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(5» 


THE   DISTRIBUTION   OF  WEALTH 


n  n 


7 


.m^ 


THE 


DISTRIBUTION    OF   WEALTH 


BY 

JOHN   R.    COMMONS 

Professok  of  Economics  and  Social  Science,  Indiana  University 


MACMILLAN    AND    CO. 

AND     LONDON 
1893 

All  riff  his  reserved 


Copyright,  1893, 
By   MACMILLAN   AND   CO. 


Tfortocoti  ^^Tfas : 

J.  S.  Gushing  &  Co.  —  Berwick  &  Smith. 

Boston,  Mass.,  U.S.A. 


mi 


■JO 
CO 
CD 


US 


pig  JEottjer 


<i* 


230259 


PREFACE 

In  the  present  essay  an  adequate  acknowledgment 
of  indebtedness  to  others  would  require  a  history  and 
criticism  of  theories  of  distribution,  pointing  out 
what  seems  to  me  to  be  of  permanent  value  in  the 
work  of  the  leading  economists,  and  showing  reasons 
for  disagreeing  with  their  weaker  and  more  transient 
arguments.  This  is  a  task  which  needs  to  be  done, 
but  for  the  present  I  am  interested  in  the  practical 
outcome  of  these  theories. 

Neither  should  the  reader  expect  to  find  in  this 
essay  more  than  an  outline.  I  have  attempted  to  cut 
a  straight  line  through  a  tangled  jungle,  and  to  give 
merely  a  glimpse  into  the  maze  of  conflicting  opin- 
ions. Each  chapter  herein  might  well  be  expanded 
into  a  volume ;  and  this  would  necessarily  be  done 
were  it  not  that  I  assume  on  the  part  of  my  readers  a 
fair  acquaintance  with  the  problems  and  the  extant 
discussions  of  the  subject. 

I  have  received  valuable  assistance  in  reading  the 
proof  and  many  helpful  suggestions  from  my  friends 
Professor  Sidney  Sherwood  of  Johns  Hopkins  Uni- 


viii  PREFACE 

versity,  Professor  Richard  T.  Ely  and  Professor 
Wm.  I.  Scott  of  the  University  of  Wisconsin,  and 
Dr.  D.  I.  Green  of  Alfred  Center,  N.  Y.  It  is  a 
pleasure  to  express  to  these  gentlemen  my  sincere 
thanks.  Most  of  all  am  I  indebted  to  my  wife, 
whose  devotion  is  in  every  line  of  this  book. 

JOHN   R.   COMMONS. 
Indiana  University,  May,  1893. 


CONTENTS 


CHAPTER   I 


Value,  Price,  and  Cost 


PAGE 

1 


CHAPTER   II 


The  Factors  in  Distribution        ...... 

21 

Section 

I. 

Introductory 

22 

Section 

II. 

Land  and  Capital 

27 

Section 

III. 

Personal  Abilities  and  Capital . 

41 

Section 

IV. 

Monopoly  Privileges  and  Legal  Rights 

44 

Section 

V. 

Law  and  Rights         .... 

59 

Section 

VI. 

Personal  Rights          .... 

65 

Section 

VII. 

Rights  of  Property     .... 

86 

Section  VIII. 

Monopoly  Privileges  .... 

101 

Section 

IX. 

Theories  of  the  Right  of  Property     . 

.     107 

Section 

X. 

Monopoly  Profits  and  Taxes 

.     112 

CHAPTER   III 

Diminishing  Returns  and  Rent    .... 
Section        I.     The  Law  of  Diminishing  Returns 
Section       II.     The  Law  of  Rent 


116 
116 
159 


CONTENTS 


CHAPTER   IV 

PAGE 

Diminishing  Returns  ani>  Distribution       ....     171 


CHAPTER   V 
Statistical  Data  238 

CHAPTER   VI 
Conclusion 249 


Is  and  macliinery. 
erial. 

Specialised. 
Non-specialised. 


)  With  franchise. 
)  Without  franchise, 
idustries.     (Trusts.) 
Qiss  conuectious,  etc. 


•< 

P 

*^  Dntract. 

<  ovement. 

%  idustry. 

^se  of  Nature's  Gifts. 

'^se  of  Public  Property. 


Full  Ownership  (Dominium). 

'  a.  Servitudes. 


Partial  Ownership 


h.  Mortgages. 

c.  Personal  rights  \ 


d.  Inheritance. 
Full  Ownership  (same  as  private). 
a.  Servitudes. 


(6)  Contracts. 


)  Partial  Ownership 


h.  IMortgages. 

c.  Eminent  Domain. 

d.  Right  of  Way. 

e.  Taxation. 
/.  Nuisance. 

g.  Public  Policy. 

h.  Fines,  Forfeitures,  Escheat. 


Procured 

by 
Faclore 


'  t  <2)  Kntnpnut 


(S«  II.) 


r^.  CoiisuinjitiDa. 

I  («>  ^o-  { i:  S;:s.,i„g. }  { s^j  i^i^t^. 

(I)  Namrel  ''■  "'"iribuUvef.t^j  With  (ranchbw. 
t»>on™.fe>  \        In<iu«trl«.    \  (_a)  Without  fnuichia(>. 
C.  Uuiufacturlos  l^dtuirics.    ('I'msia.) 

I  I  D,  Good  will,  busia««  coimectloiu,  etc 

I  I  A.  I'fttcntfl. 

(2}  ArUficIa)  J  li.  Copyriehta. 

iij-fih       j  O.  Tniiie.mark9. 


(  {A)  Contract 


s  Oifta. 


Vic  of  I'ublic  IToptrty. 

{A)  Full  Ownoreldp  CDomlnhim). 

(/I)  I'ariial  Omierahlp 


( fl)  Partial  Ownerehip  I 


Mortgages, 
inwnal  rlghhi  j  Jg  J^^, 


.  Inh 


a  privai4;). 

ervitudcs. 

.  Murttcagev. 

'.  Right  0 


I.  Servitudes. 
.  MuTttcage«. 
'.  Kroinf  nt  DomaiQ. 


.  Flues,  For(«ltUR«,  Esobmu 


Cj 


CHAPTER   I 

VALUE,    PRICE,    AND   COST 

Keferences  :  It  is  proposed  in  this  chapter  to  give  only  enough 
of  the  theory  of  Value  to  introduce  the  principles  of  Distribution. 
The  theory  is  based  primarily  on  the  work  of  the  Austrian  econo- 
mists. But  the  Austrians,  in  simply  holding  that  Value  depends 
upon  Usefulness  and  Scarcity,  have  added  nothing  to  the  classical 
dogma  of  Demand  and  Supply  except  the  mere  conception  of  Mar- 
ginal Utility.  This  is  a  serviceable  conception,  but  it  does  not 
help  us  out  of  the  dogmatism  and  logomachy  of  the  older  doc- 
trine. Yet  it  gives  a  scientific  basis  for  explaining  the  fundamental 
question  of  Value  ;  namely.  What  are  the  forces  which  control  the 
supplies  of  commodities  relatively  to  the  demands  ?  Upon  the 
answer  to  this  question  the  whole  theory  of  Distribution  depends. 
The  solution  is  attempted  in  this  and  the  following  chapters.  The 
work  of  the  Austrians  is  best  outlined  for  English  readers  in 
Smart's  Introduction  to  the  Theory  of  Value,  London  and  New 
York,  1891.  See  also  Bohm-Bawerk,  Positive  Theory  of  Capital, 
translated  by  Smart,  London  and  New  York,  1891.  The  master 
constructive  mind  of  the  Austrian  school  is  Wieser.  See  Der  Nat- 
Wrliche  Werth,  Vienna,  1889,  a  translation  of  which  is  announced 
by  Messrs.  Macmillan  &  Co.  American  writers  stand  next  to  the 
Austrians,  especially  Clark,  Philosophy  of  Wealth,  Boston,  1886, 
and  Patten,  Theory  of  Dynamic  Economics,  Philadelphia,  1892. 
Gunton  develops  the  law  of  prices  and  cost  in  an  interesting  way. 
See  Wealth  and  Progress,  New  York,  1887,  and  Principles  of  Social 
Economics,  New  York,  1890.  The  discussions  in  the  Quarterly 
Journal  of  Economics  and  the  Annals  of  the  American  Academy 
of  Political  and  Social  Science  are  highly  valuable. 

The  modern  problem  of  the  Distribution  of  Wealth 
is  the  outcome  of  a  social  organisation  based  on  pri- 


2  THE  DISTRIBUTION   OF   WEALTH  chap. 

vate  property,  division  of  labour,  and  exchange.  The 
share  of  the  social  income  which  an  individual  or  a 
class  obtains  is  therefore  a  problem  of  the  ratios  at 
which  the  various  products  are  exchanged.  The 
ratios  of  exchange  depend  upon  the  relative  values 
of  commodities  to  the  members  of  society.  Ulti- 
mately, therefore,  an  analysis  of  Value  is  the  door- 
Avay  to  a  theory  of  Distribution. 

Back  of  value  lies  utility.  Human  wants  are  not 
only  the  great  motive  power  in  economic  conduct; 
they  also  determine  the  value  of  economic  products. 
Utility  is  that  attribute  of  external  objects  which 
fits  them  to  satisfy  human  wants. 

But  the  economist  has  a  different  view  of  utility 
from  that  taken  by  the  chemist,  physiologist,  psychol- 
ogist, or  moralist.  These  discuss  what  may  be  called 
abstract  utility;  that  is,  the  qualities  of  external 
objects  and  their  physical  or  moral  adaptation  to 
satisfy  the  wants  of  human  nature.  The  economist 
discusses  concrete  or  quantitative  utility;  that  is, 
utility  depending  upon  the  actual  and  relative  inten- 
sity of  different  wants.  He  examines  the  physical 
and  social  conditions  which  compel  men  to  exert 
themselves  in  order  to  satisfy  these  wants.  The 
physiologist  and  moralist  take  notice  that  man  has 
different  kinds  of  wants,  and  that  the  satisfaction  of 
some  of  these  is  more  essential  for  his  life  and  well- 
being  than  that  of  others.  Air,  water,  food,  cloth- 
ing, shelter,  luxuries,  ornaments,  education,  religion, 
supply  wants  of  very  different  human  significance. 


I  VALUE,   PRICE,   AND    COST  3 

The  economist,  while  he  must  begin  with  a  recog- 
nition of  these  various  kinds  of  wants,  finds  his  most 
significant  fact  in  the  varying  degrees  in  which 
nature  and  society  supply  the  material  for  satisfying 
them. 

He  notices  that  these  wants  vary  in  the  relative 
amounts  of  material  needed  for  their  satisfaction; 
that  labourers  will  spend  about  50%  of  their  resources 
for  subsistence;  16%  for  clothing;  20%  for  shelter; 
4%  for  fuel;  and  10%  for  sundries.^ 

Now,  the  significance  of  this  fact  is  to  be  found 
in  the  diminishing  scale  of  utility.  The  different 
kinds  of  wants,  no  matter  what  their  importance 
from  a  physiological  or  moral  point  of  view,  are 
capable  of  satiety.  The  first  increments  consumed 
may  give  a  very  intense  pleasure,  but  succeeding 
increments  will  give  less  pleasure  until,  perhaps, 
finally  an  increment  is  reached  whose  consumption 
gives  no  pleasure  at  all.  This  is  the  point  of  satiety. 
The  only  differences,  from  the  economic  standpoint, 
between  different  kinds  of  wants  are,  on  the  one 
hand,  the  different  quantities  of  goods  necessary  to 
supply  them  up  to  the  point  of  satiety,  and,  on  the 
other  hand,  the  different  degrees  of  provision  which 
nature  and  society  make  for  them. 

A  want  —  or  rather  a  need  —  is  not  felt  unless  the 
provision  for  its  supply  is  occasionally  short  of  the 
point  of  satiety.  We  may,  perhaps,  have  the  most 
urgent  and  intense  need  for  electricity  in  the  atmos- 

1  Massachusetts  Bureau  of  Labour  Statistics  for  1883. 


4  THE  DISTRIBUTION   OF   WEALTH  chap. 

phere.  But  nature  provides  this  electricity  so  abun- 
dantly that  we  never  realise  the  want  of  it.  We  are 
seldom  conscious  of  our  need  of  air  —  by  far  the  most 
urgent  and  extensive  need  of  life — because  we  al- 
ways have  an  abundance  of  air,  and  the  point  of 
satiety  is  constantly  reached.  The  needs  for  elec- 
tricity, air,  and,  perhaps,  water  are  not  properly 
wants,  because  we  are  not  conscious  of  them.  A 
true  want  must  be  felt. 

But  there  are  wants  which  are  periodically  felt. 
Nature,  while  lavish  in  her  supply  of  our  intense 
need  for  air,  is  niggardly  in  her  supply  of  food, 
clothing,  and  shelter. 

The  degree  to  which  the  different  wants  are  felt 
depends  upon,  1,  the  extent  of  the  supply  needed 
before  the  point  of  satiety  is  reached,  and,  2,  the 
quantity  of  the  supply  habitually  furnished  relative 
to  the  need.  Therefore  it  is  that  the  most  significant 
need  is  often  the  least  want,  and  that  such  important 
and  natural  needs  as  those  for  food  are  often  less  felt 
than  such  acquired  wants  as  those  for  intoxicants. 
The  intensity  of  the  want  depends  upon  the  degree 
of  satisfaction  which  has  been  reached  in  the  descend- 
ing scale  of  utility.  This  depends  upon  the  quan- 
tity of  the  good  in  question  which  has  already  been 
supplied.  The  least  intense  want  of  a  given  kind 
which  is  actually  supplied  marks  the  marginal  utility 
of  the  article  supplying  it.  Marginal  utility,  then, 
is  quantity  of  utility  or  pleasurable  sensation  af- 
forded by  the  last  increment  of  commodity  actually 


I  VALUE,    PRICE,   AND    COST  5 

enjoyed.  The  marginal  utilit)^  of  different  kinds  of 
goods  does  not  depend  upon  the  kind  of  want,  except 
as  the  kind  determines  the  quantity  wanted.  It 
depends  directly  upon  the  relative  supply.  It  is 
scarcit}^  that  prevents  the  marginal  utility  from 
descending  to  w?7,  but  scarcity  is  a  relative  term 
and  always  refers  to  the  quantity  needed.  An 
amount  which  may  be  bountiful  in  supplying  one 
kind  of   wants   may  be  very  limited    in    supplying 

Diagram   I. 


other  kinds.  Marginal  utility,  therefore,  may  be 
less  in  the  case  of  indispensable  wants  than  in  the 
case  of  dispensable  ones. 

In  Diagram  I.  let  ah  measure  the  quantity  of  satis- 
faction obtained  from  the  first  increment  of  food,  and 
ac  from  that  of  clothing.  If  the  diminishing  scale 
of  the  utility  of  food  follows  the  line  hd^  and  the 
actual  supply  of  food  is  «e,  the  marginal  utility  will 
be  ed.     If  the  clothing  scale  is  ck,  and  the  supply  is 


6  THE  DISTRIBUTIOiV   OF  WEALTH  chap. 

only  a/",  then  the  marginal  utility  will  be  fg.  The 
actual,  felt  want  for  clothing,  therefore,  measured 
by  its  marginal  utility,  is  greater  than  the  felt  want 
for  the  far  more  indispensable  utility,  food. 

Wants  as  just  described  are  the  first  component 
of  demand.  Resources  is  the  second.  By  resources 
is  meant  simply  one's  share  of  the  social  product, 
no  matter  what  the  cause  or  origin  of  that  share. 
If  his  share  is  large,  he  may  receive  so  large  a 
quantity  of  all  products  that  the  marginal  utility 
of  each  will  be  lower  to  him  than  the  average 
marginal  utility  to  societ3^  Or,  if  his  share  be 
small,  then  the  marginal  utilities  may  be  higher 
than  those  of  societ}^ 

We  have  here  reached  the  essential  nature  of  sub- 
jective value.  It  depends  upon  marginal  utility. 
But  it  extends  further  than  the  marginal  increments 
of  commodities.  By  means  of  his  intelligence  the 
individual  ascribes  to  those  increments  which  he 
consumes  before  the  marginal  increment  is  reached 
the  same  concrete  utility  which  he  gives  to  the  mar- 
ginal increment.  This  is  subjective  value.  Sub- 
jective value  is  an  intellectual  estimate  of  the 
quantity  of  utility  embraced  in  definite  amounts  of 
a  commodity  depending  upon  the  marginal  utility  of 
the  commodity. 

Now,  in  order  to  get  the  largest  possible  total  en- 
joyment from  his  share  of  the  social  product,  the 
individual  must  not  choose  from  this  product  equal 
quantities  of  different  kinds  of  commodities.     This 


I  VALUE,   PRICE,   AND    COST  7 

is  because  his  wants  are  not  equal  in  extent.  If 
he  did  so  choose,  then  some  wants,  being  relatively 
less  completely  supplied  than  others,  would  yield 
high  marginal  utilities,  and  others,  being  relatively 
over-supplied,  would  give  but  little  satisfaction.  A 
greater  economy  of  expenditure  and  a  higher  total 
enjoyment  are  obtained  when,  by  restricting  the  sup- 
ply of  those  wants  that  are  over-supplied  and  that 
give,  therefore,  little  marginal  satisfaction,  he  is 
able  to  increase  the  supply  of  those  wants  where  the 
marginal  satisfactions  are  still  high.  The  diagram 
on  page  5,  as  originally  presented,  would  represent  a 
wasteful  expenditure  of  resources.  A  higher  total 
utility  is  obtained  by  reducing  the  expenditures  for 
food  from  ae  to  ag',  and  increasing  the  expenditures 
for  clothing  from  af  to  af.  Then  for  a  loss  of  utili- 
ties measured  by  the  area  e'edd',  he  would  gain  a 
larger  sum  of  utilities  measured  hyffg'g.  The  highest 
possible  total  enjoyment  is  obtained  when  the  individ- 
ual, taking  into  account  the  relative  extent  of  his 
different  wants  and  the  amount  of  his  resources, 
distributes  his  exj)enditures  in  such  proportions  that 
the  marginal  utilities  in  all  lines  of  expenditures 
will  be  equal. 

How  is  the  individual  to  do  this?  In  the  first 
place,  he  receives  his  share  of"  the  social  product  not 
directly  in  the  form  of  goods,  but  indirectly  in 
the  form  of  money.  He  speaks  of  his  income,  not 
as  one  of  social  products,  but  of  money.  When  he 
gets  his  actual  true  income, —  food,  clothing,  shelter. 


8  THE  DISTRIBUTION  OF  WEAITH  chap. 

■ — ■  he  speaks  of  it  not  as  income,  but  as  expenditure. 
Money  represents  for  him  a  general  claim  upon  the 
goods  of  society,  and,  therefore,  enables  him  to  dis- 
tribute his  expenditures  among  the  different  kinds 
of  goods  in  proportion  to  the  relative  extent  of  his 
different  wants. 

Having  his  money  income,  he  now  purchases  social 
products  of  different  kinds,  up  to  the  point  where 
he  judges  the  marginal  utilities  of  all  kinds  to  be 
equal.  That  is  to  say,  he  aims  to  get  for  the  last 
unit  of  money  expended  in  one  line  of  goods,  a  return 
of  satisfaction  equal  to  that  obtained  from  the  last 
unit  expended  in  any  other  line.  But  in  making 
these  purchases  he  is  compelled  to  accept  the  prices 
of  commodities  which  he  finds  current  in  the  market. 
In  other  words,  he  accommodates  his  subjective  val- 
uations to  the  ruling  objective  values.  Objective 
value  is  not  a  quantity  of  utility,  but  it  is  the  ratio 
at  which  commodities  exchange. 

Money  is  the  common  measure  of  objective  val- 
ues. The  fact  that  money  gives  command  over 
the  products  of  society  makes  it  possible  for  the 
individual  to  receive  his  income  in  it.  Objective 
value  expressed  in  money  is  price.  Now,  it  is  to  be 
noticed  that  expenditures  are  distributed  in  the  pro- 
portions in  which  we  'find  them,  because  i^rices  are 
what  they  are.  Should  the  prices  of  subsistence  fall 
one-half,  wages  remaining  the  same,  the  workingman 
who  spends  50%  of  his  income  for  subsistence  would 
redistribute  his  expenditures,  so  that,  perhaps,  35% 


I  VALUE,   PRICE,   AND    COST  9 

would  go  for  subsistence,  and  larger  proportions  for 
the  other  utilities.  In  this  way  the  purchaser  would 
again  distribute  his  resources  to  the  best  advantage, 
and  would  gain  the  largest  total  satisfaction.  His 
wants  for  subsistence  would  now  be  much  better 
supplied  by  an  expenditure  of  35%  of  his  income, 
and  the  marginal  utilities  of  subsistence  would  be 
lower,  so  that  expenditures  in  that  line  would  give 
him  less  satisfaction.  But  by  extending  his  expen- 
ditures in  other  lines,  and  supplying  new  wants  with 
higher  marginal  utilities,  he  readjusts  the  employ- 
ment of  his  resources  on  a  basis  suited  to  the  new 
relations  of  prices.  It  cannot  be  said,  therefore, 
that  any  particular  supply  of  a  commodity  is  neces- 
sary. The  quantity  demanded  depends  upon  the 
prices  asked.  The  demand  is  for  a  certain  quantity 
at  a  certain  price,  not  for  a  certain  quantity  at  any 
price.  The  extent  of  the  demand  depends  upon  the 
height  of  the  price;  it  increases  as  the  price  falls, 
and  diminishes  as  the  price  rises. 

Here  arises  the  all-important  kind  of  subjective 
value  in  our  treatment  of  Distribution,  namely,  "sub- 
jective-exchange value,"  depending  on  the  objective 
values  of  commodities.  This  kind  of  subjective 
value  is  not  a  quantity  of  utility.  Quantity  of 
utility  is  simply  quantity  of  pleasurable  feelings. 
Subjective-exchange  value  is  an  intellectual  estimate 
of  the  ratio  existing  between  marginal  utilities.  Value, 
whether  subjective-exchange  or  objective,  is  always 
a  relative  term,  indicating  a  ratio,  while  utilitv,  or 


10  THE  DISTRIBUTION  OF   WEALTH  chap. 

subjective  value  proper,  is  an  absolute  term,  indicat- 
ing a  quantity  of  satisfaction.  To  the  poor  man  all 
the  marginal  increments  may  afford  high  satisfaction, 
because  his  supplies  are  limited ;  but  to  the  rich  man 
the  marginal  increments  may  give  little  satisfaction. 
Yet  each,  though  on  different  levels,  endeavours  to 
make  the  marginal  increments  in  all  lines  equal. 
A  function  of  money  is  to  enable  the  individual  to 
portion  out  his  resources  in  this  way.  Money  —  or, 
rather,  the  individual's  subjective  estimate  of  money 
—  is  the  ultimate  measure  of  marginal  utilities,  and 
therefore  of  subjective  values.  It  is  therefore  the 
common  unit  for  determining  the  ratios  of  marginal 
utilities.  This  differs  for  different  individuals. 
One's  estimate  of  the  value  of  money  tends  to  vary 
directly  with  one's  avarice,  and  inversely  with  one's 
resources.  To  the  rich  man  and  to  the  spendthrift 
the  dollar  is  a  smaller  unit  of  subjective  valuation 
than  to  the  poor  man  and  the  miser,  and  it  requires 
a  larger  number  of  dollars  (or  units  of  money)  to 
measure  the  same  satisfaction.  Consequently,  the 
unit  of  subjective  valuation  is  not  the  same  for  all. 
It  is,  to  speak  exactly,  the  reciprocal  of  the  current 
monetary  unit  and  one's  resources,  modified  by  the 
co-efficient  of  one's  avarice. 

Individuals,  so  far  as  they  are  called  upon  at  all 
to  estimate  the  value  to  them  of  commodities  and 
services,  do  so,  either  consciously  or  unconsciously, 
in  terms  of  money.     They  grow  up  from  childhood 


I  VALUE,   PRICE,   AND    COST  11 

in  the  habitual  use  of  money,  and  the  significance  of 
valuable  objects  to  them  is  immediately  referred  to 
the  money  with  which  they  are  familiar.  A  profes- 
sional man,  considering  what  a  horse  may  be  Avorth 
to  him  for  physical  exercise,  thinks  of  the  price  he 
can  afford  to  pay  for  the  horse.  This  is  the  only  wa}^ 
in  which  he  can  estimate  its  subjective  value  in  com- 
parison with  its  market  value.  In  doing  so,  he  esti- 
mates not  the  absolute  worth  of  the  horse  to  him,  — 
the  total  pleasurable  experiences,  —  but  he  estimates 
the  proportion  of  his  total  resources  he  can  afford  to 
devote  to  this  purpose,  in  order  that  the  marginal 
utility  of  his  expenditure  here  may  equal  that  else- 
where. Thus,  subjective-exchange  value  is  not  sim- 
ply a  ratio  between  marginal  utilities ;  it  is  also  the 
ratio  between  the  marginal  utility  of  a  single  line 
of  expenditure  and  the  marginal  utility  of  all  other 
lines  of  expenditure  taken  together.  And  money  is 
the  common  subjective  measure  which  the  individual 
uses  in  portioning  out  his  resources  among  his  sev- 
eral wants  in  such  ratios  as  to  gain  for  himself  the 
highest  aggregate  satisfaction.  Whether  this  aggre- 
gate satisfaction  be  high  or  low,  measured  by  the 
standard  of  quantity  of  utilit}^,  he  does  not  stop  to 
think.  He  only  considers  the  actual  ratio  of  the 
utilit}^,  or  subjective  value,  in  question  to  all  the 
other  utilities  which  his  resources  allow  him  to  com- 
mand. Thus  it  is  "subjective-exchange  value,"  and 
not  "subjective  value,"  upon  which  our  studies  must 


12  THE   DISTRIBUTION  OF    WEALTH  chap. 

mainly  turn   in    a   treatment  of   distribution  based 
upon  private  property  and  exchange. ^ 

The  law  of  diminishing  utility,  as  above  stated, 
requires  a  very  important  qualification  before  it  can 
correctly  explain  the  phenomena  of  consumption. 
According  to  this  statement  it  would  be  expected 
that  the  rich  consume  greater  quantities  of  a  given 
commodity  than  the  poor,  and  that  the  marginal 
increments,  therefore,  give  less  satisfaction  than 
those  consumed  by  the  poor.  This  is  contrary  to 
facts.  The  poor  are  more  likely  to  consume  in  mere 
quantity  much  more  than  the  rich.  The  defect  is, 
that  the  law,  as  stated,  does  not  take  into  account 
improvements  in  quality  and  variety.  It  applies 
only  to  a  single  kind  of  goods  and  a  uniform 
quality.  But  the  rich,  instead  of  consuming  greater 
quantities  of  goods  as  their  resources  increase,  en- 
deavour to  keep  up  the  marginal  utility  by  improving 
the  quality  and  increasing  the  variety  of  their  con- 
sumption. Instead  of  using  coarse,  heavy  bread, 
they  have  fine,  light  bread;  instead  of  pork  they  eat 
game ;  instead  of  shoddy  they  wear  woollens ;  instead 
of  shanties  they  inhabit  palaces.  Thus  the  marginal 
utilities  of  their  consumption  are  kept  up,  and  the 
total  satisfactions  of  life  are  greater.  Still,  the  law 
of  diminishing  utility  holds  good  as  one  of  the  great 

1  The  reader  is  referred  to  Smart's  Introduction  to  the  Theory 
of  Value  for  the  full  treatment  of  these  various  conceptions.  The 
terminology  of  the  Austrian  economists  has  been  adopted  through- 
out this  discussion,  though  there  seems  to  be  room  for  improve- 
ment. 


I  VALUE,   PRICE,   AND    COST  13 

principles  of  economics.  An  improved  quality  of 
goods  is  simply  a  grouping  together  of  goods  and 
services,  w^bich,  if  consumed  separately,  would  give 
diminishing  utility.  The  man  who  eats  venison 
instead  of  bacon  consumes  what  cost,  perhaps,  ten, 
instead  of  one,  day's  labour.  Had  he  eaten  ten 
days'  product  of  bacon,  the  labour  producing  it  would 
have  been  Avorth  very  little  to  him,  because  the 
marginal  utility  of  bacon  would  have  been  very  low. 
Thus,  improvements  in  quality  are  efficient  methods 
for  resisting  the  universal  law  of  diminishing 
utility. 

We  have  now  considered  the  main  conditions 
which  influence  the  demand  of  the  individual  for 
goods.  It  follows  that  if  all  wants  were  supplied  to 
satiety,  for  all  people,  there  would  be  no  values  and 
no  exchange.  No  wants  would  be  felt,  and,  there- 
fore, no  effort  would  be  made  to  supply  them.  Bat 
we  know  that  some  goods  require  labour  to  procure 
them;  they  have  real  costs  of  production,  and  they 
have  values.  This  is  due  to  no  other  reason  than 
that  their  supply  is  limited  relatively  to  their  demand. 
The  price  of  any  commodity  —  that  is,  the  proportion 
of  social  product  which  society  will  give  for  it  — 
depends  upon  the  ratio  of  its  supply  to  its  demand, 
compared  with  the  ratios  of  the  supplies  of  other 
articles  to  their  demands.  If  the  supply  increases, 
the  demand  will  increase,  but  at  a  lower  price. 
Society,  like  every  individual,  accepts  the  prices  of 
commodities  as  it  finds  them,  and  regulates  expendi- 


14  THE   DISTRIBUTION  OF   WEALTH  chap. 

tiires  thereby,  with  the  prime  economical  purpose  of 
securing  equal  quantities  of  satisfaction  for  equal 
marginal  expenditures,  and  thus  the  greatest  aggre- 
gate satisfaction. 

And  so,  for  society,  as  well  as  for  the  individual, 
it  is  meaningless  to  say  that  there  is  a  necessary 
supply.  All  that  we  can  speak  of  is  the  customary 
supply.  It  would  be  true  to  the  facts  if  we  should 
say  that  the  normal  value  of  any  commodity  is  deter- 
mined by  the  customary  supply  of  that  commodity^  rel- 
ative to  the  customary  demand  for  it,  compared  with 
the  customary  supplies  of  all  other  commodities,  relative 
to  the  demands  for  them. 

With  these  results  before  us,  the  important  ques- 
tion of  economics  is  this :  What  are  the  forces  which 
limit  the  supplies  of  commodities  relatively  to  the 
demands  for  them? 

The  only  thing  which  can  directly  satisfy  human 
wants  is  the  material  of  nature.  This  must  be  fur- 
nished to  man  in  appropriate  forms.  Nature  sup- 
plies some  needs  —  the  most  extensive  —  in  abun- 
dance, with  material  already  prepared,  as  air  and 
sunlight.  These  are  free  goods,  and  their  marginal 
utility  is  nothing.  Other  goods  are  scarce,  and  can 
be  obtained  only  when  human  labour  controls  and 
exploits  nature.     These  are  economic  goods. 

But  human  labour  is  always  more  or  less  associated 
and  organised.  Men  do  not  work  alone.  It  is  im- 
possible in  these  days  to  determine  how  much  any 
individual  contributes  to  the  social  product,  because 


I  VALUE,   PRICE,   AND    COST  IS 

his  contribution  cannot  be  measured  in  goods  but 
only  in  values.  Society,  composed  of  associated  and 
organised  individuals  and  working  as  a  unit,  produces 
goods  in  varied  abundance.  These  goods  are  distrib- 
uted among  the  members  of  society,  and  the  relative 
abundance  of  each  kind,  compared  with  the  relative 
demand  for  it,  determines  its  value  to  all  the  mem- 
bers. Water  is  so  near  the  line  of  free  goods,  that 
even  where  labour  is  required  to  procure  it,  the  sup- 
ply is  so  abundant  as  to  reduce  the  marginal  utility 
very  nearly  to  nil.  Nature  is  more  niggardly  in  fur- 
nishing material  for  other  wants,  and  social  labour, 
therefore,  cannot  produce  them  in  such  relative  abun- 
dance. 

But  the  niggardliness  of  nature  is  not  the  only 
cause  for  limiting  the  supply  for  certain  human 
wants.  There  are  important  social  institutions  and 
regulations  which  do  the  same  thing.  Government 
sometimes  does  this  with  the  express  purpose  of 
increasing  the  price  of  the  article  to  purchasers,  as 
in  the  cases  of  intoxicants,  narcotics,  and  oleomar- 
garine. But  more  especially  does  government  give 
this  power  to  individuals  through  the  institution  of 
private  property,  and  the  creation  of  artificial  mo- 
nopoly privileges.  Private  property  in  land  is  simply 
the  power  given  to  individuals  to  combine  with 
nature  in  limiting  the  supply  of  land  relatively  to  the 
demands  of  society  for  it.  Rent  is  that  share  of 
the  social  income  which  landowners  can  command 
by  virtue  of   this   ownership.     It  is   a  part  of  the 


16  THE  DISTRIBUTION  OF   WEALTH  chap. 

cost  of  production  of  every  article  which  society 
consumes.  There  is  no  product  which  is  not 
produced  upon  rent-paying  land.  If  we  agr-ee  that 
the  most  expensive  part  of  the  customary  supply  of 
a  commodity  determines  the  price  of  the  whole,  then 
we  can  always  find  that  a  portion  of  the  expenses  of 
production  of  this  part  goes  to  pay  the  rent  of  land- 
lords. Take  an  agricultaral  product  like  wheat. 
The  poorest  land  in  the  United  States  on  which 
wheat  is  grown  is  worth,  at  least,  five  dollars  per 
acre,  exclusive  of  improvements.  Then  in  its  vari- 
ous transformations  from  the  wheat-grower  to  the 
bread-eater,  this  product  turns  off  successive  rent- 
payments  to  the  ground  landlords,  upon  whose  land 
are  located  the  warehousemen,  wholesale  dealers, 
speculators,  millers,  bakers,  and  retailers.  Every 
other  product  which  society  uses  is  subject  to  these 
same  conditions. 

There  are  other  monopolies  besides  land  which  get 
a  share  of  the  value  of  ever}'  product,  and  they  are 
able  to  do  so  because  their  supply  is  limited  relatively 
to  th-e  demand  for  them.  Transportation  and  tele- 
graph monopolies  are  an  element  of  expense  for  every 
product.  Five-sixths  of  the  manufacturing  of  the 
United  States  is  based  on  patents,  and  patents  are 
simply  exclusive  rights  to  sell,  i.e.  exclusive  rights 
to  limit  the  supply  of  articles  relatively  to  the  de- 
mand. Trusts  obtain  their  power  to  regulate  prices 
only  through  their  power  to  regulate  supply. 

All  of  these   monopoly  elements    have  power  to 


I  VALUE,  PRICE,   AND    COST  17 

limit  supply,  and  thus  to  keep  values  above  the  real 
costs  of  production.  But  there  are  a  great  many 
enterprises  and  many  producers  who  do  not  possess 
these  monopoly  privileges.  With  them  competition 
plays  freely;  that  is  to  say,  they  produce  goods  in 
such  abundance  that  the  value  of  the  goods  falls  to 
the  real  cost  of  production.  Their  competition  goes 
on  above  these  monopoly  elements.  It  is  "  marginal  " 
or  "  peripheral "  competition.  Here,  only,  is  value 
determined  by  cost. 

By  cost  of  production  is  meant,  in  all  cases,  the 
pain,  efforts,  and  sacrifices  of  the  producers.  Ex- 
penses of  production  regulate  prices,  but  expenses 
include  more  than  real  costs.  The  whole  mechanism 
of  exchange  centres  around  the  retail  dealer,  who 
sells  directly  to  consumers.  He  fixes  his  prices  at 
such  a  figure  as  will  cover  not  only  the  expenses  of 
his  goods  to  himself,  but  also  his  own  rents,  wages, 
interest,  and  necessary  profits.  If  free  competition 
plays  fully  upon  him,  he  can  get  no  higher  prices 
than  these.  But  whether  he  gets  only  these  or  higher 
prices,  his  only  means  of  forcing  purchasers  to  pay 
his  prices  is  by  having  the  power  to  prevent  sales  at 
lower  prices;  that  is,  a  control  over  the  supply. 
He  limits  supply  by  purchasing  of  wholesale  dealers 
only  that  quantity  of  goods  which  he  thinks  can  be 
taken  off  at  paying  prices.  Thus  the  value  of  the 
finished  product  is  distributed  back  among  all  the 
factors  of  production.  Each  factor  determines  its 
own  share  through  its  power  of  limiting  its  contri- 
bution to  the  finished  product. 


18  THE  DISTRIBUTION  OF   WEALTH  chap. 

The  factors  which  have  been  mentioned  above 
are  strictly  monopoly  factors,  with  well-recognised 
powers  of  controlling  supply.  There  are  two  other 
factors  where  perhaps  cost  of  production  ma}^  be  the 
controlling  factor.  These  are  capital  and  labour. 
The  complete  exposition  of  the  cost  of  production  of 
capital  and  labour  will  be  developed  in  Chapter  IV., 
but  we  may  here  anticipate  that  discussion,  in  order 
to  supply  an  important  link  in  the  theory  of  value. 

By  cost  of  production  of  capital  is  not  meant  the 
cost  of  producing  the  raw  material,  because  the  value 
of  raw  material  includes  payments  for  monopoly 
profits,  rent,  and  wages.  What  is  meant  is  interest 
on  capital.  Capital  is  simply  stored-up  products  of 
labour.  It  can  be  freely  stored  up,  the  quantity  can 
be  indefinitely  increased  relatively  to  the  demand, 
and  the  rate  of  interest  can  thereby  be  forced  down 
to  the  cost  of  production.  The  cost  of  production  is 
the  sacrifice  or  abstinence  of  the  savers  of  capital, 
measured  by  the  intensity  of  the  pleasures  which 
they  forego,  the  risks  they  assume,  and  the  length  of 
time  they  have  to  wait.  Now,  a  great  deal  of  capi- 
tal is  saved  which  represents  no  abstinence  whatever. 
It  is  simply'  a  reinvestment  of  profits,  which,  if  spent 
in  present  enjoyments,  would  bring  only  surfeit  and 
ennui.  But  no  man,  not  even  the  richest,  can  save 
capital  indefinitely.  A  point  is  reached  where  sac- 
rifice appears.  Then  the  rate  of  interest,  or  future 
pleasure,  is  balanced  against  present  pleasures  post- 
poned, and  the  cost  of  saving  is  equal  to  the  rate  of 


I  VALUE,   PRICE,   AND    COST  19 

interest.  Only  his  marginal  savings  represent  cost 
equal  to  the  rate  of  interest,  but  on  all  savings  before 
the  marginal  the  rate  exceeds  the  cost.  If  we  say 
that  interest  is  proportional  to  the  marginal  cost  of 
saving  capital,  then  it  is  true  that  cost  of  production, 
so  far  as  interest  enters  into  it,  is  determined  by  the 
cost  of  saving  the  most  expensive  part  of  capital 
which  enters  into  social  production. 

The  same  principle  holds  true  of  wages.  The  cost 
of  living  of  a  given  class  of  labourers  may  be  looked 
upon  as  the  cost  of  production  of  that  class.  But, 
just  as  in  the  case  of  interest,  it  is  not  the  cost  of 
production  of  all  the  labourers,  but  only  of  the  most 
expensive  part  of  the  customary  supply  that  deter- 
mines the  wages  of  the  class.  The  influences  which 
limit  the  supply  are  different  for  different  classes. 
Among  the  higher  and  organised  classes  it  is  prin- 
cipally the  possession  of  monopoly  advantages ;  with 
the  weakest  classes  it  is  the  minimum  of  jDhysical 
existence. 

These,  then,  are  the  only  cases  where  it  can  be 
said  that  cost  of  production  determines  prices.  Yet 
in  each  of  them  it  is  questionable  whether  costs 
should  be  looked  upon  as  causes  or  as  coincidences. 
At  any  rate,  their  importance  in  the  expenses  of  pro- 
duction of  final  commodities  is  lessened  when  we 
notice  what  has  already  been  said  concerning  the  part 
pla3'ed  by  monopolies. 

Before  attempting  a  final  statement  of  the  law  of 
prices  we  must  notice  the  significance  of  the  term, 


20  THE  DISTRIBUTION  OF   WEALTH  chap,  i 

"  the  most  expensive  part "  of  the  customary  supply. 
If  we  were  dealing  with  pure  physics,  we  might  say 
that  the  most  expensive  part  need  not  be  more  than 
one  per  cent  of  the  whole,  because  the  necessary 
supply  would  not  be  forthcoming  unless  the  price 
should  rise  high  enough  to  cover  the  expenses  of 
producing  this  one  per  cent.  But  we  are  dealing 
with  so  very  elastic  a  set  of  forces  as  human  wants, 
human  resources,  and  human  enterprise.  A  "trust" 
cannot  control  the  prices  of  its  products  unless  it 
control  70%  to  90%  of  the  total  product.  And  it  may 
well  be  that  in  all  competitive  enterprises  the  same 
proj)ortion  would  hold  true.  At  least,  the  propor- 
tion must  be  so  large  that  the  minorit}^  who  have 
cheaper  expenses  of  production,  may  not  be  able  to 
extend  their  supplies  far  enough  to  meet  the  entire 
demand. 

The  final  statement  of  the  law  of  prices,  to  be  pre- 
cise, cannot  be  brief,  but  it  may  be  loosely  stated  as 
follows,  reserving  for  Chapter  IV.  the  demonstration 
of  particular  points.  The  'price  of  a  commodity  is 
determined  by  the  expenses  of  production  of  the  most 
expensive  j^ar^  of  the  customary  supply.  This  supply 
is  determined  hy  the  relative  poiver  possessed  by  the 
differeiit  co-operating  productive  factors  of  limiting 
their  share  of  the  total  product  relatively  to  the  wants 
and  resources  of  society.  Cost  of  production  coincides 
with,  and  partly  determines,  expenses  in  the  case  of 
the  marginal  savings  of  capitalists,  marginal  monopoly 
labourers,  and  all  freely  competing  labourers. 


CHAPTER   II 

THE   FACTORS   IN   DISTRIBUTION 

References  :  It  is  not  ti-ue  that  one  definition  is  as  good  as 
another,  provided  that  you  hold  to  the  same  definition  tliroughout 
your  discussion.  Definition  is  analysis,  and  nothing  in  economics 
to-day  is  more  important  than  analysis.  It  is  true  that  we  have 
no  concrete  entities  like  a  hoi'se  or  a  house  to  describe,  but  we 
have  groups  of  relations  and  phenomena  which  must  be  clearly 
separated  according  to  their  salient  characteristics,  if  we  are  to 
have  clear  thinking.  And  if  definitions  are  profound,  they  will  be 
fruitful,  and  will  lead  naturally  to  a  discovery  of  the  forces 
and  laws  that  operate  in  the  distribution  of  wealth.  The  ablest 
discussion  of  definitions,  and  one  to  which  the  writer  is  indebted 
in  many  particulars,  is  Bohm-Bawerk's  Eechte  unci  Verhdltnisse 
vom  volkswirthsdiaftlichen  Standpunktp,  Innsbruck,  1883;  es- 
pecially has  the  writer  followed  Dr.  Bohm-Bawerk  in  the  impor- 
tant distinction  hereafter  made  between  full,  or  absolute,  and  par- 
tial rights  of  property,  and  in  his  presentation  of  the  true  nature 
of  monopoly  privileges,  other  than  land.  At  the  same  time,  it 
is  surprising  that  this  eminent  thinker  should  have  made  so 
little  use  of  his  earlier  profound  treatise,  and  in  his  later  Positive 
Theory  of  Capital  should  have  put  to  one  side  the  results  of  his 
investigations  into  the  nature  of  private  property,  and  fallen  back 
upon  so  very  inadequate  a  distinction  between  social  and  pri- 
vate capital  as  that  between  productive  and  consumption  goods. 
This  distinction  is  criticised  in  the  earlier  pages  of  this  chapter. 
The  economic  significance  of  property  is  nowhere  so  ably  expounded 
as  by  Wagner  in  Lehrbuch  der  Politischen  Oekonomie,  Bd.  I.,  Berlin, 
1879.  Samter,  Das  Eigentwn,  Jena,  1879,  is  worth  reading.  Eng- 
lish and  American  writers  have  sadly  neglected  this  field,  and  the 
only  books  to  which  reference  can  be  made  are  Holland,  Elements 
of  Jurisprudence,  sixth  edition,  London,  1890,  and  Donisthorpe, 

21 


22  THE  DISTRIBUTION   OF  WEALTH  chap. 

Individualism,  a  System  of  Politics,  London  and  New  York,  1889. 
See  also  Clark,  Philosophy  of  Wealth,  Boston,  1886,  and  Capi- 
tal and  its  Earniyigs,  American  Economic  Association,  Vol.  III. 

The  accompanying  table  is  intended  to  present  in  condensed 
form  an  outline  of  the  argument  of  this  chapter. 


Section  I. — Introductory. 

Man  has  certain  capacities,  faculties,  or  powers, 
which,  when  put  into  a  certain  amount  and  kind  of 
exercise,  give  him  pleasurable  sensations.  These 
capacities  include  his  entire  sentient  nature.  When 
they  are  not  exercised  at  all,  he  experiences  unpleas- 
ant sensations,  which  are  called  wants.  When  they 
are  sufficiently  exercised,  those  pleasurable  sensa- 
tions follow  which  he  calls  satisfaction  of  wants. 
When  they  are  over-exercised,  unpleasant  sensations 
follow,  which  he  calls  weariness,  or  ennui.  Finally, 
when  they  are  exercised  in  a  way  contrary  to  their 
nature,  there  follow  unpleasant  sensations  called 
pain. 

Satisfaction  of  wants  can  come  about  only  through 
contact  with  external  material  nature.  In  order  that 
these  sensations  may  be  pleasant,  the  material  of 
nature  must  have  certain  forms  and  certain  relations 
of  time  and  space  with  reference  to  man,  so  that  they 
may  be  properly  adapted  to  his  faculties,  and  may 
come  into  contact  with  them  at  the  time  when  he 
experiences  his  wants. 

When  the  material  of  nature  assumes  these  forms 
under  these  conditions,  so  as  to  satisfy  wants,  we 


II  THE   FACTORS  IN  DISTRIBUTION  23 

call  it  goods.  The  term  wealth  might  be  used,  but 
this  term  usually  refers  to  large  quantities  of  dura- 
ble goods,  and  is  not  therefore  sufficiently  broad  for 
our  purposes.  Goods,  or  good  things,  then,  are 
those  forms  of  external  matter  which  are  adapted  to 
satisfy  human  wants.  They  are  not  the  faculties  or 
capacities  themselves.  Every  pleasurable  feeling 
has  two  sides,  an  internal  or  subjective,  and  an 
external  or  objective.  The  internal  is  the  human  sen- 
sibilities, or  faculties ;  the  external  is  the  material  of 
nature.  In  order  that  the  pleasurable  feelings  may 
arise,  the  two  must  be  brought  into  contact.  We 
are  accustomed  to  refer  the  cause  of  the  satisfaction, 
not  to  the  subjective  side,  but  to  the  objective,  and 
this  we  call  a  good,  or  goods.  The  faculties  are  not 
themselves  goods,  because  they  do  not  satisfy  their 
own  wants.  The  very  idea  of  want  signifies  the 
need  of  contact  on  the  part  of  these  faculties  with 
external  nature  in  some  appropriate  form.  When 
this  contact  is  experienced,  the  want  is  satisfied,  and 
we  consider  the  external  object  a  good  thing. 

Besides  material  goods,  there  are  also  direct  satis- 
factions of  wants  received  from  other  persons  in 
the  form  of  services.  In  its  ultimate  analysis  this 
involves  also  contact  with  external  material  nature.^ 
For  example,  a  teacher  may  instruct  me  either 
verbally  or  through  a  printed  book  which  I  have 
purchased.  In  the  latter  case,  he  satisfies  my  want 
through  the  medium  of  a  material  object,  the  book, 

1  See  Clark,  TMl.  of  Wealth,  Chap.  I. 


24  THE  DISTRIBUTION  OF  WEALTH  chap. 

which  we  call  a  "good";  in  the  former  case  he 
satisfies  my  want  directly,  and  we  call  the  effort 
and  the  satisfaction  a  service.  All  goods  which 
are  the  product  of  labour  may  themselves  be 
looked  upon  as  services.  They  are  simply  the 
material  for  carrying  human  services  from  the  pro- 
ducer to  the  user.  They  are  valuable,  not  on  account 
of  their  niaterial  alone,  but  on  account  of  the  human 
service  which  they  embody.  Their  value  depends 
mainly  upon  the  value  of  these  services,  and  when 
we  speak  of  goods,  we  mean  generally  the  good 
services  which  they  convey  to  us.  In  general, 
therefore,  the  reasoning  which  applies  to  goods, 
so  far  as  diminishing  and  marginal  utility  is  con- 
cerned, applies  also  to  services,  and  it  will  be 
convenient  to  consider  only  the  former. 

But  human  faculties  and  capacities  have  a  twofold 
function.  While,  on  the  one  hand,  they  are  the  sub- 
ject of  pleasurable  sensations,  brought  about  by  con- 
tact with  appropriate  external  exciting  agents,  they 
are  also  the  means  or  conditions  for  acquiri^ig  these 
external  agents.  The  human  being  is  one  and 
indivisible.  His  personal  abilities,  his  power  to 
labour  and  acquire  good  things,  is  one  side  of  the 
same  faculties  which  enjoy  these  good  things.  The 
power  to  labour  and  economise  is  a  result  of  the  satis- 
factions gained  from  food,  clothing,  shelter,  educa- 
tion, and  amusements.  The  process  of  eating  food  is 
pleasurable  in  itself  —  the  food  satisfies  the  wants  of 
the  physical  faculties  of   our   nature.     Also,   these 


II  THE  FACTORS  IN  DISTRIBUTION  25 

physical  faculties  are  the  means  whereby  we  procure 
not  only  food,  but  other  goods,  for  the  satisfaction 
of  our  wants.  Reasons  will  be  given  later  to  show 
why  these  faculties  should  not  be  classed  as  capital. 

Free  goods  are  those  Avant-satisfying  forms  of 
external  nature  which  are  unlimited  in  quantity, 
and  consequently,  as  a  whole,  physically  inappropri- 
able.  Economic  goods  are  limited  and  physically 
appropriable  in  whole  or  in  part. 

The  attributes  of  economic  goods,  whereby  they 
satisfy  wants,  are  called  utilities.  These  utilities, 
in  the  sight  of  the  economist,  are  not  mere  capacities 
existing  in  thought,  but  certain  actual  relations  of 
external  objects  with  reference  to  human  beings. 

One  attribute  which  is  always  tacitly  assumed 
throughout  all  discussions  of  economic  goods  is 
legal  appropriability.  This  is  a  social  relation, 
characterised  by  the  term  "private  rights  of  prop- 
erty," and  consists  in  "the  capacity  residing  in  one 
man  of  controlling,  with  the  assent  and  assistance 
of  the  state,  the  actions  of  others"  ^  with  reference 
to  the  economic  good  in  question.  This  attribute 
might  be  called  a  utility,  but  the  utilities  usually 
assigned  to  economic  goods  are  of  four  kinds,  —  ele- 
mentary, form,  time,  and  place.  By  elementary 
utility  is  meant  the  original  constituents  of  matter 
as  found  in  nature,  by  which  it  is  fitted  to  satisfy 
human  wants  either  directly  or  to  be  worked  up  by 
human  labour  so  as  to  satisfy  wants.     Form-utility 

1  Holland,  Elements  of  Jurisprudence,  p.  71. 


26  THE  DISTRIBUTION  OF  WEALTH  chap. 

is  given  to  this  original  combination  of  matter  by 
human  labour,  first  in  the  extractive  industries,  then 
in  manufactures.  Time-  and  place-utility  consist  in 
the  presence  of  the  material  goods  at  the  time  and 
place  when  and  where  man  can  make  use  of  them. 

Abstract  names  are  given  to  different  utilities  cor- 
responding to  the  different  kinds  of  wants  which  the 
material  goods  satisfy,  as  sweetness,  warmth,  shel- 
ter, beauty.  The  generic  term  covering  all  these  ab- 
stractions is  pleasure.  For  example,  to  say  that  a 
building  produces  shelter  is  to  say  shortly  that 
material  external  nature  has  been  so  disposed  as  to 
afford  conditions  for  many  comforts  of  life,  and  to 
prevent  the  pain  which  arises  from  exposure  to  wind 
and  weather.     So  with  warmth,  beauty,  sweetness. 

The  character  of  the  wants  which  are  satisfied  is 
not  taken  into  account  when  discussing  simply  the 
creation  or  existence  of  utilities.  This  belongs  to 
a  discussion  of  the  consumption  or  use  of  utilities. 
Whatever  satisfies  a  human  want,  no  matter  what 
kind  of  want  it  may  be,  is  a  good,  and  possesses  all 
five  of  the  utilities  above  mentioned.  It  is  legally 
set  aside  for  the  exclusive  use  of  the  consumer ;  it 
has  originally  been  extracted  in  the  form  of  raw 
material  from  the  earth,  and  contains  those  elemen- 
tary chemical  constituents  which  are  fitted  to  supply 
human  wants;  it  has  been  fashioned  and  formed 
in  such  a  way  as  to  satisfy  the  human  want  for 
which  it  was  designed;  and  it  has  been  brought  to 
the  consumer  at  the  time  and  place  when  and  where 
he  wants  it. 


II  THE  FACTORS  IN  DISTRIBUTION  27 

This  is  production :  the  creation  of  all  or  any  of 
the  above  utilities.  And  productive  labourers  are 
those  who  are  engaged  in  the  creation  of  any  of 
these  utilities. 

Besides  the  economic  goods  just  mentioned,  which 
satisfy  human  wants  directly,  it  is  usual  to  speak  of 
indirect  economic  goods  which  are  used  to  produce 
the  direct  goods.  Direct  goods  are  called  consumer's 
goods.  Indirect  goods  are  capital.  Capital  is  the 
material  economic  goods  which  labourers  employ  in 
producing  utilities.  It  must  be  borne  in  mind  that 
an  essential  attribute  of  capital  is  value;  that  is  to 
say,  it  must  alwaj^s  be  limited  in  quantity  relatively 
to  the  demand  for  it. 

It  is  usual  to  restrict  capital  to  those  material 
goods  which  are  themselves  the  product  of  labour, 
and  therefore  to  place  land  in  a  category  by  itself. 
This  is  because  there  are  believed  to  be  certain  laws 
of  production  and  distribution  which  apply  to  laud, 
but  not  to  capital. 

Section  II.  —  Land  and  Capital. 

It  is  important  to  get  a  clear  distinction  between 
land  and  capital.  According  to  the  usual  defini- 
tions it  is  land  which  furnishes  the  raw  material, 
the  forces  of  nature.  Land  is  held  to  be  almost 
identical  with  nature.  The  material  of  nature 
becomes  capital  as  soon  as  labour  is  applied  to  it  and 
it  is  Avorked  up  into  useful  forms.     According  to 


28  THE  DISTRIBUTION  OF  WEALTH  chap. 

this  definition,  it  logically  follows  that  a  tree  stand- 
ing in  the  forest  is  land,  but  as  soon  as  it  is  felled 
it  becomes  capital.  A  mustang  roaming  over  the 
plains  is  land;  when  captured,  and  trained  to  do 
man's  bidding  and  satisfy  his  wants,  it  becomes 
capital.  Iron  ore  in  the  bowels  of  the  earth  is  land; 
when  the  miner  has  dug  it  out  it  is  capital.  But  a 
different  treatment  is  usually  accorded  to  the  fertile 
soil  which  is  useful  in  agriculture.  Soil  is  held  to 
be  land  before  any  labour  is  applied  to  it,  and  it 
remains  land,  in  so  far  as  its  original  and  indestruc- 
tible qualities  are  concerned,  even  after  the  appli- 
cation of  labour.  The  same  is  true  of  such  natural 
sources  of  power  as  a  waterfall  —  this  is  looked  upon 
always  as  land,  being  furnished  by  nature  above  and 
beyond  the  results  of  man's  labour.  The  embank- 
ments, the  conduits  for  utilising  the  force  of  the 
water,  are  capital,  but  the  waterfall  itself  is  always 
land. 

Taking  these  examples  into  consideration,  there 
must  arise  a  suspicion  that  the  analysis  of  capital 
and  land  from  the  economic  standpoint  has  not  been 
thoroughly  made.  Such  is  indeed  the  fact.  Land 
is  a  common  requisite  of  all  classes  of  industries; 
not  only  of  the  extractive  industries,  but  also  of 
manufactures  and  commerce.  If  we  generalise  the 
common  attribute  of  land  required  by  all  these 
industries,  we  find  it  is  not  the  forces  and  material 
of  nature.  These  are  not  furnished  by  land  to 
manufactures,   but   have    already  become  capital  as 


II  THE   FACTORS  IN  DISTRIBUTION  29 

soon  as  the  farmer  and  the  miner  have  taken 
them  from  nature,  and  before  the  manufacturer 
has  touched  them.  What  land  furnishes  to  all 
industries  is  simply  room  and  situation.  This  is 
the  fundamental  idea  of  land  in  production  and  dis- 
tribution. It  is  nothing  more  than  the  bare  surface 
of  the  earth.  Not  land,  but  capital,  embodies  the 
forces,  energies,  and  material  of  nature.  These 
forces  and  energies  are  cohesion,  attraction,  heat 
and  light,  electricity,  chemical  forces,  and  the  vital 
forces.  They  are  wrapped  in  material  forms,  and  it 
is  thus  that  man  is  able  to  utilise  them.  When  they 
exist  simply  in  their  raw  and  wild  state,  we  should 
call  them  nature  and  not  land.  Land  merely  fur- 
nishes room  for  nature  to  work  upon  the  surface  of 
the  earth,  just  as  it  furnishes  room  for  man  to  work. 
And  when  the  forces,  energies,  and  material  of 
nature  are  combined  with  the  labour  of  man,  land 
furnishes  room  for  the  two  to  work  together  in  the 
production  of  utilities. 

All  that  man  can  do  by  labour  in  any  industry  is 
to  change  the  places  of  things.  In  every  case,  labour 
is  simply  "putting  things  into  fit  places  for  being 
acted  upon  by  their  own  internal  forces,  and  by  those 
residing  in  other  natural  objects."  As  soon  as  this 
is  done,  the  material  employed  ceases  to  be  mere 
nature,  and  becomes  capital.  This  is  just  as  true 
regarding  the  soil  employed  in  agriculture  and  the 
waterfall,  as  it  is  for  iron  ore  and  domesticated 
animals.     Soil  is  capital  as  soon  as   labour    is  em- 


30  THE   DISTRIBUTION  OF  WEALTH  chap. 

ployed  in  clearing  the  land,  draining,  fencing, 
plowing,  fitting,  fertilising,  and  planting.  These 
operations  are  not  different  in  kind  from  those  em- 
ployed in  manufactures.  They  consist  only  in  chang- 
ing the  places  of  the  material  of  nature.  The  main 
difference  is,  that  they  make  use  of  the  vital  forces 
of  nature  to  a  greater  extent  than  is  done  in  manu- 
factures. But  this  is  not  a  fundamental  distinction 
for  the  economist.  Vital  forces  are  but  part  of  the 
forces  of  nature,  and  should  be  grouped  with  the 
others.  Man  utilises  them  in  the  same  way  as 
the  other  forces.  Soil  must  be  renewed  and  repaired 
year  after  year  like  machiner3^  From  the  very  first 
application  of  labour  to  it,  in  order  to  make  it  use- 
ful to  man,  it  becomes  capital  (i.e.  stored-up  labour). 
The  same  reasoning  will  apply  to  a  waterfall.  Not 
merely  the  machinery  is  capital,  but  also  the  fall 
itself. 

There  are  two  or  three  possible  difficulties  in  this 
distinction  between  land  and  capital  which  must  be 
explained. 

1.  We  must  guard  against  the  mistake  of  assum- 
ing that  in  agriculture  and  water-power  nature  per- 
forms a  greater  proportion  of  the  work  of  production 
than  in  manufactures.  On  this  point  the  criticisms 
made  by  Dr.  Bohm-Bawerk  on  the  theories  of  Henry 
George  are  concise  and  to  the  point.^  He  says: 
"The  separation  of  production  into  two  grouj)S,  in 
one  of  which  the  vital  forces  of  nature  form  a  dis- 

^  Capital  and  Interest,  p.  417. 


II  THE  FACTORS  IN  DISTRIBUTION  31 

tinct  element  in  addition  to  labor,  while  in  the  other 
they  do  not,  is  entirely  untenable.  George  here 
repeats,  in  a  somewhat  altered  form,  the  old  mistake 
of  the  physiocrats,  who  would  not  allow  that  nature 
co-operates  in  the  work  of  production  except  in  one 
single  branch  of  it,  agriculture.  The  natural  sci- 
ences have  long  ago  told  us  that  the  co-operation 
of  nature  is  universal.  All  our  production  rests  on 
the  fact  that  by  the  application  of  natural  forces  we 
put  imperishable  matter  into  useful  forms.  Whether 
the  natural  power  of  which  we  avail  ourselves  in 
this  be  vegetative  or  inorganic,  mechanical  or  chem- 
ical, makes  no  difference  whatever  in  the  relation 
in  which  natural  power  stands  to  labour.  It  is 
quite  unscientific  to  say  that,  in  production  by  means 
of  a  plane,  'labour  alone  is  the  efficient  cause.'  The 
muscular  movement  of  the  man  who  planes  would  be 
of  very  little  use  if  the  natural  powers  and  properties 
of  the  steel  edge  of  the  plane  did  not  come  to  his 
assistance.  Is  it  even  true  that  on  account  of  the 
character  of  the  plank-planing,  as  a  simple  change  of 
form  or  place  of  the  material,  nature  can  do  nothing 
without  labour?  Can  we  not  fasten  the  plane  into 
an  automatic  machine,  and  get  it  driven  by  the  force 
of  steam ;  and  will  not  the  plane,  untiring,  continue 
the  production  even  when  the  carpenter  sleeps? 
What  more  does  nature  do  in  the  oTowing-  of 
grain  ? " 

2.  Even  if   it  could  be  proven  that  nature  does 
more  in  the  vegetative  properties  of  the  soil  than  in 


32  THE  DISTRIBUTION  OF  WEALTH  chap. 

the  mechanical  properties  of  buildings  and  machines, 
the  capitalistic  properties  of  the  soil  would,  never- 
theless, not  be  disproved.  The  question  as  to  the 
proportion  between  what  nature  furnishes  and  what 
human  labour  furnishes  does  not  enter  into  the 
definition  of  capital.  All  that  is  essential  to  the  idea 
of  capital  is  a  union  of  nature  and  labour,  without 
reference  to  the  proportion  in  which  the  two  are 
combined.  It  may  be  true  that  the  value  of  the 
nature-element  employed  is  greater  than  that  of  the 
labour  employed.  But  value  is  composed  of  two 
elements,  utility  and  scarcity.  Granting  that  the 
forces  of  nature  embodied  in  a  given  kind  of  raw 
material  are  capable  of  being  made  useful  by  labour, 
the  relative  scarcity  of  that  material  compared  with 
labour,  and  with  other  kinds  of  material,  may  give 
it  a  high  value ;  but  if  it  has  any  value  at  all  (or  a 
highly  disproportionate  value  compared  with  labour) 
it  is  capital,  and  not  nature  or  land.  Only  when 
the  material  of  nature  is  so  abundant  as  to  have 
no  value  at  all,  as  air,  sunshine,  does  the  co-opera- 
tion of  labour  with  it  fail  to  make  capital  of  it.  It 
is  economic  goods,  i.e.  limited  goods,  and  not  free 
goods,  which  become  capital. 

3.  These  free  goods  have  a  peculiar  place  in  all 
industries.  It  may  be  thought  that  they  contribute 
more  to  agriculture  than  to  manufactures ;  and, 
therefore,  again,  that  nature  in  the  form  of  air,  sun- 
shine, rain,  climate,  does  more  in  agriculture  than 
in  manufactures.      There  are  two  answers  to  this. 


II  THE  FACTORS  IN  DISTRIBUTION  33 

The  first  is  that  already  given,  that,  being  free 
goods,  they  do  not  contribute  to  the  value  of  capital. 
Capital  is  essentially  an  economic  instrument;  its 
significant  attribute  is  value.  It  has  value  because 
it  is  useful  and  limited  in  quantity.  This  value 
may  be  given  to  it  partly  by  the  fact  that  the  mate- 
rial of  nature  of  which  it  is  composed  is  limited  in 
quantity,  and  partly  because  the  labour  entering  into 
it  is  limited.  But  in  so  far  as  free  and  unlimited 
goods  enter  into  it,  no  value  is  given  to  it,  and  so 
far  it  is  not  capital. 

Second,  further  analysis  shows  that  these  free  gifts 
of  nature  are  simply  the  universal  appendages  or 
attributes  of  the  room  which  land  furnishes.  They 
are  the  common  free  gifts  of  nature,  which,  though 
free,  yet  require  room  upon  the  earth's  surface  for 
their  appropriation.  And  they  are  as  necessary  to 
manufactures  as  to  agriculture,  and  require  like 
room.  Manufacturing  establishments  could  not 
utilise  steam  were  it  not  for  the  air  Avhich  produces 
combustion,  nor  could  operatives  work  without 
breathing-  and  living-space;  sunlight  and  rain  have 
also  their  part  in  manufactures.  Labour  does  not 
create  these  elements;  they  are  free  gifts.  But 
labour  requires  room  to  use  them  in  the  production 
of  goods,  and  this  is  what  land,  properly  speaking, 
furnishes.^ 

1  Besides  the  strictly  free  gifts  of  nature  which  are  phj'sically 
inappropriable,  there  are  materials  of  nature  which,  though  physi- 
cally appropriable,   are  legally  inappropriable.     Such  are  rivers, 


34  THE  DISTRIBUTION  OF  WEALTH  chap. 

4.  Where  the  material  of  nature  has  a  value  in  its 
original  state,  and  before  it  has  become  capital 
through  the  application  of  labour,  this  value  is 
usually  clue  to  its  situation.  To  ])ring  out  the  sig- 
nificance of  this  distinction  will  require  a  careful 
investigation. 

Situation  always  has  reference  to  the  aggregations 

furnishing  power  for  transportation.  Now,  legal  appropriability  is 
not  an  attribute  of  capital,  viewed  from  the  standpoint  of  produc- 
tion or  of  societ}^  It  is  simply  the  power  granted  an  individual  of 
securing  for  his  own  use  the  fruits  of  capital.  It  has  nothing  to  do 
with  the  nature  of  the  material  good  itself  —  it  is  simply  a  social 
relation,  enforced  by  the  power  of  the  state.  According  to  our 
analysis  the  combination  of  material  and  forces  of  nature  which 
goes  to  make  a  river  is  social  or  national  capital,  because  it  is  used 
by  all  the  people  free  of  charge,  and  can  only  become  useful  when 
labour  is  employed  in  co-operation  with  it,  as  in  propelling  vessels, 
dredging  and  deepening  harbours  and  shoals,  constructing  docks  and 
wharves.  But  the  room  occupied  by  the  river  and  its  banks,  includ- 
ing the  situation  with  reference  to  the  habitations  and  industrial 
activities  of  man,  is  land.  Though  the  river  itself,  as  capital,  cannot 
be  made  private  property,  yet  its  banks,  as  furnishing  room  for 
shipping,  may  be  ;  and  this  gives  opportunity  to  invest  labour  and 
capital  productively  through  access  to  social  capital,  the  river.  It 
is  only  a  historical  and  legal  incident  that  the  river  itself  is  con- 
sidered to  be  national  instead  of  private  j^roperty.  In  mediaeval 
times  rivers  were  indeed  the  private  property  of  the  feudal  nobles. 
If  they  were  private  property  to-day  they  would  still  be  strictly 
capital  in  the  sense  of  material  economic  goods  used  for  further 
production,  but  the  profits  from  their  use  would  not  be  distributed 
among  society  at  large  by  reason  of  free  access  to  the  carrying 
forces  of  the  river,  but  would  be  diverted  into  private  pockets. 

The  ocean,  on  the  other  hand,  is  not  capital,  because  it  is  physi- 
cally inappropriable  as  a  whole.  But  the  harbours  and  rivers  along 
its  coast  are  national  or  private  capital,  being  physically  appropri- 
able, and  the  situation-value  of  these  harbours  —  i.e.  the  sites  oc- 
cupied by  docks  and  wharves  —  is  land. 


II  THE  FACTORS  IN  DISTRIBUTION  35 

of  man  in  society.  That  situation  is  said  to  be  best 
for  economic  purposes  which  is  most  conveniently 
accessible  for  the  largest  body  of  men  engaged  in 
economic  activities.  Land  which  is  not  accessible 
to  men  has  no  value,  neither  has  the  material  of 
nature  which  rests  upon  it.  Pine  forests  in  Michi- 
gan well  situated  —  i.e.  easily  accessible  to  markets 
—  are  worth  perhaps  two  hundred  dollars  per  acre. 
The  same  timber  in  central  Canada  is  worth  ten 
and  twenty  dollars  per  acre,  but  in  the  northern 
wilds  of  Canada  it  is  worth  nothing.  Yet  in  each 
case  it  embodies  the  same  quantity  and  quality  of 
the  material  of  nature.  Again,  of  two  tracts  of  land 
equally  well  situated,  the  one  covered  with  pine  and 
the  other  with  walnut,  if  the  pine  is  worth  two  hun- 
dred dollars  per  acre,  the  walnut  is  worth  one  thou- 
sand dollars  per  acre.  What  do  these  facts  show 
with  reference  to  the  relative  weight  of  the  material 
of  nature  and  the  situation  of  land  in  determining 
value  ? 

The  explanation  rests  upon  the  Austrian  theory 
of  complementary  goods. ^  There  are  four  kinds  of 
utilities  which  an  article  must  have  in  order  to 
satisfy  human  wants ;  namely,  elementary,  form, 
time,  and  place.  The  article  may  be  looked  upon 
as  a  group  composed  of  these  four  utilities.  In 
order  to  have  value,  the  article  must  also  be  limited 
in  quantity  with  reference  to  the  wants  supplied  by 
it.     Its  maximum  value  is  determined  by  its  marginal 

1  See  Smart,  pp.  40-45 ;  Bohm-Bawerk,  Positive  Theory  of 
Capital,  pp.  170-178. 


36  THE  DISTRIBUTION  OF  WEALTH  chap. 

utility  as  a  group.  Now,  all  of  these  utilities  are 
replaceable  except  place  utility,  which  is  irreplace- 
able. According  to  the  theory  of  complementary 
goods,  the  replaceable  members  can  never  obtain  any 
other  value  than  that  which  they  get  from  their 
marginal  utility  in  all  other  uses.  But  the  irreplace- 
able members  absorb  all  the  remainder  of  the  value  of 
the  group.  In  the  case  of  pine  trees,  the  elementary 
utility  is  practically  unlimited,  if  we  take  into 
account  the  world's  supply  of  pine.  Therefore, 
considered  alone,  the  marginal  utility  of  the  ele- 
mentary utility  is  m7,  and  its  value  in  all  cases  is 
consequently  nothing.  Form-  and  time-utilities  are 
the  product  of  labour  and  capital.  They  are  there- 
fore replaceable,  and  so  cannot  command  a  greater 
value  than  capital  and  labour  can  command  in  the 
general  uses  to  which  they  are  put.  These  three 
elements  are  constant  in  any  given  article.  There 
now  remains  place-utility.  This  arises  in  two 
ways.  It  may  be  produced  by  labour  and  capital, 
as  when  an  article  is  brought  to  the  user  from 
a  distance.  In  so  far,  place-utility  is  a  replaceable 
element,  depending  on  the  replaceable  elements, 
labour  and  capital,  and  so  much  of  place-utility 
as  depends  on  labour  and  capital  cannot  have  a 
greater  value  than  the  labour  and  capital  which 
produced  it.  But  place  -  utility  may  be  given 
originally  by  land  itself.  In  this  sense  it  is  the  sur- 
plus above  the  cost  of  the  replaceable  elements,  and 
consequently  it  varies  in  amount  inversely  as  the 
replaceable   elements.     The  maximum  place-utility 


THE  FACTORS  IN  DISTRIBUTION 


37 


is  given  to  an  article  when  it  is  in  the  place  where 
the  user  wants  to  use  it.  But  usually  the  article 
must  be  brought  from  a  distance.  In  that  case,  the 
cost  of  bringing  it  is  the  cost  of  remunerating  the 
replaceable  elements,  capital  and  labour,  which  have 
brought  it.  If  it  has  been  brought  from  so  great  a 
distance  that  the  cost  of  bringing  it  equals  the  maxi- 
mum utilit}',  then  there  is  no  surplus  to  go  to  the 
irreplaceable  element,  the  original  situation.  But 
if  the  cost  of  bringing  the  article  to  the  user  is 
less  than  the  maximum  utility,  there  remains  a 
surplus  which  is  absorbed  by  the  irreplaceable 
element,  land  situation. 

In  the  accompan3dng  diagrams,  let  the  maximum 
utility  of  pine  lumber  equal  twelve  dollars.  In 
each  diagram  the  form-  and  time-utility  are  the 
same,  being  the  result  of  equal  amounts  of  labour  and 


Place. 


Form. 
3 


Time. 
I     1 


Labour.     3 


Situation.     5 


12 


Form. 


Place. 


Time.  ^ 


3                     1 

1 

Labour  and  Capital.     5 

Situation.  3 

12 


Place. 


Form. 
3 


Time. 
I     1 


Labour  and  Capital.     8 


12 


38  THE  DISTRIBUTION  OF  WEALTH  chap. 

capital.  Elementary  utility  does  not  appear,  because 
it  has  no  value.  But  place-utility  is  sliared  between 
labour  and  capital  on  the  one  hand,  and  land  situa- 
tion on  the  other. 

There  are  $8.00  to  be  thus  shared,  because  $4.00 
have  already  been  absorbed  by  the  replaceable  ele- 
ments, labour  and  capital,  which  produced  the  form 
and  time-utilities.  If  the  pine  is  at  such  a  distance 
that  it  will  cost  $8.00  to  bring  it  to  the  user  (figure 
C),  there  will  be  no  surplus  left  for  situation.  But 
if  the  cost  of  bringing  it  is  $5.00  (figure  B),  there 
is  a  surplus  of  $3.00  for  the  irreplaceable  element, 
situation,  and  if  the  cost  is  $3.00  (figure  A),  there 
is  $6.00  for  situation. 

The  same  reasoning  will  hold  for  two  different 
kinds  of  elementary  utilities  which  have  equally 
accessible  situations,  as  the  walnut  and  pine  timber 
already  cited.  The  reason  why  walnut  timber  is 
more  valuable  than  pine  is  not  because  the  marginal 
elementar}'-  utilities  of  walnut  are,  as  a  whole, 
greater,  but  because  accessible  walnut  is  found  in 
such  limited  quantities  that  the  marginal  utility  of 
such  walnut  does  not  descend  so  low  as  that  of  pine. 
This  is  saying,  simply,  that  the  place-utility  of 
walnut  is  more  limited  in  proportion  to  the  demand 
than  is  the  place-utility  of  pine.  If  it  can  be  shown 
that  the  world's  supply  of  walnut  is  so  limited  that, 
irrespective  of  situation,  all  the  walnut  in  existence 
has  a  value,  then,  of  course,  a  part  of  its  value  would 
be  due  to  its  limited  elementary  utilities,  and  another 


II  THE  FACTORS  IN  DISTRIBUTION  39 

part  to  its  place-utility.  But,  in  order  to  demon- 
strate such  a  proposition,  it  would  be  necessary  to 
show  that  all  the  world's  supply  of  walnut  is  acces- 
sible at  a  cost  less  than  the  maximum  utility  of 
walnut  at  the  place  of  using  it.  Then  if  the  most 
distant  of  the  Avorld's  supply  of  walnut  timber,  whose 
cost  of  bringing  to  market  is  the  highest,  has  still 
a  maximum  value  exceeding  the  cost  of  production, 
this  excess  must  be  attributed  to  the  limited  quantity 
of  its  elementary  utilities.  But  it  cannot  be  proven 
that  the  elementary  utilities  are  thus  limited. 

The  same  holds  true  for  all  the  other  forces  and 
energies  of  nature,  such  as  mineral  deposits,  rivers, 
waterfalls,  animals,  etc.  A  waterfall  in  the  centre 
of  Greenland  has  no  value,  though  it  embodies  the 
most  useful  forces  of  nature.  But  a  similar  waterfall 
in  New  England  has  great  value,  because,  in  addition 
to  its  elementary  utilities,  attraction  and  cohesion,  it 
has  a  situation  so  near  the  habitations  of  men  that 
the  utilities  which  it  helps  to  produce  can  be  conveyed 
to  consumers  without  absorbing  in  the  cost  of  trans- 
portation all  the  maximum  value  of  the  utilities.  A 
surplus  value  remains,  which  is  attributed  to  the 
place-utility  of  the  waterfall.  ^ 

In  conclusion,  the  following  propositions  seem  to 
be  sustained:  1.   The  function  of  land  in  the  theory 

1  The  doctrine  of  complementary  goods  is  capable  of  fruitful 
applications  in  many  branches  of  economic  theory.  Especially 
may  it  be  employed  to  explain  the  difficult  problem  of  the  connec- 
tion between  qualities  of  goods  and  their  values. 


40  THE  DISTRIBUTION   OF  WEALTH  chap. 

of  economics  is  to  furnisli  simply  room  and  situa- 
tion; 2.  The  value  of  land  is  due  to  its  situation; 
3.  Capital,  instead  of  land,  embodies  the  forces  and 
energies  of  nature;  4.  The  maximum  utility  of  an 
article  to  the  user  may  be  looked  upon  as  a  group  of 
complementary  goods  or  utilities,  namely,  elementary-, 
form-,  time-,  and  place-utilities ;  5.  The  first  three  of 
these  making  up  the  group  are  replaceable,  and  the 
fourth  is  partly  replaceable  and  partly  irreplaceable ; 
6.  The  replaceable  elements  have  their  value  deter- 
mined through  competition  in  all  the  general  em- 
ployments of  industry  where  they  are  found;  7.  The 
irreplaceable  elements  absorb  the  surplus  of  the 
maximum  value  above  that  going  to  remunerate  the 
producers  of  the  replaceable  elements;  8.  Nature 
contributes  only  the  elementary  utilities  to  goods, 
but  these  utilities  are  replaceable  and  usually  so 
abundant,  taking  the  world's  supply  into  account, 
that  in  themselves  their  marginal  utility  is  zero, 
and  consequently  they  have  no  value;  9.  Labour 
and  capital  are  replaceable  factors,  contributing 
form-  and  time-utilities  to  goods,  and,  therefore, 
these  utilities  absorb  as  much  of  the  maximum  value 
as  the  same  quantities  of  labour  and  capital  absorb 
in  other  industries ;  10.  Place-utility,  so  far  as  it  is 
produced  by  labour  and  capital,  absorbs  a  share  of  the 
maximum  value  in  the  same  way  as  form-  and  time- 
utilities;  11.  Where  a  surplus  of  utility  remains 
after  deducting  the  values  of  all  the  replaceable 
utilities  from  the  maximum  value,  the  surplus  goes 


II  THE  FACTORS  IN  DISTRIBUTION  41 

to  the  irreplaceable  element,  the  land  situation  of 
the  original  material  —  and  this  is  not  because  the 
world's  supply  of  the  material  is  limited,  but  because 
the  quantity  of  material  found  in  this  particular 
original  situation,  and  in  all  accessible  situations,  is 
limited  with  reference  to  the  demand  for  it. 

Section  111. —  Personal  Abilities  and  Capital. 

While  economists  generally  agree  to  distinguish 
between  land  and  capital,  they  almost  universally 
class  personal  abilities  and  business  privileges  as 
capital,  because  it  is  held  that  these  are  means  of 
production  whereby  the  individual  acquires  or  pro- 
duces economic  goods.  There  are  several  reasons 
why  these  should  not  be  classed  as  capital.  First  as 
to  personal  abilities. 

1.  Man  is  not  a  slave  nor  a  machine,  the  object  of 
private  property;  and  his  earning  power  is  never  in 
business  operations  capitalised  like  that  of  land  or 
capital.^  The  basis  of  capitalisation  is  a  surplus 
above  costs  of  production.  A  workman  does  not  him- 
self capitalise  his  labour  power,  and  count  the 
capitalisation  as  part  of  his  resources,  because  he 
considers  that  the  Avork  he   does    is    fully   equal  to 

1  I  am  informed  that  an  exception  to  this  statement  is  often 
found  in  partnerships.  The  exception,  however,  does  not  weaken 
the  argument.  Since  the  "Capitalization"  in  such  a  case  is  not 
based  on  ownership  but  is  a  mere  convenience  in  order  to  find  a 
commensurable  basis  for  sharing  profits  with  capital  and  other 
factors. 


42  THE  DISTRIBUTION   OF  WEALTH  chap. 

the  income  he  gets,  and  there  is  no  surplus  above 
the  laborious  effort  involved,  like  rent  or  interest, 
which  can  represent  net  earnings,  and  be  properly 
capitalised.^ 

Neither  does  his  employer  place  a  capital  value 
upon  the  labourer,  because  he  does  not  possess  ex- 
clusive private  property  in  him.  Were  the  labourer 
his  slave,  then  the  owner  would  capitalise  him  upon 
the  following  principles :  He  would  ascertain  the 
wealth-producing  ability  of  the  slave.  From  this 
he  would  deduct  all  the  expenses  of  providing  for 
and  guarding  him.  This  would  give  an  annual  sur- 
plus above  the  cost  of  production  of  the  labourer's 
product.  Then  the  owner  would  estimate  the  prob- 
able duration  of  the  slave's  physical  powers,  and 
hence  the  probable  continuance  of  this  surplus 
product.  Finally,  taking  into  account  the  current 
rates  of  interest,  he  would  capitalise  the  slave  at 
that  amount  of  money  which  would  yield,  in  other 
investments,  a  sum  of  interest  equal  to  the  surplus 
product.  If  the  current  rate  of  interest  were  low, 
the  capitalisation  would  be  high,  because  it  would 
require  in  other  investments  a  larger  amount  of  capital 
to  yield  the  given  surplus  product  than  it  would  if 
the  current  rate  of  interest  were  high. 

But  nothing   of   the   kind    occurs  with   the   free 

labourer.     He  is  paid  for  the  actual  product  of  his 

labour,  irrespective  of  the  cost  of  his  maintenance; 

and  if  there  should   be  a  surplus   above  this   cost, 

1  Bohm-Bawerk,  Eeclite  und  VerhuUnlsse,  pp.  89-92. 


II  THE  FACTORS  IN  DISTRIBUTION  43 

the   labourer  himself  would  be  the   one  to  capital- 
ise it. 

(2)  It  is  lield  that  so  much  of  a  man's  personal 
abilities  as  results  from  his  industrial  education  is 
capital,  since  the  expenses  of  his  education  are  an 
investment  for  future  profits  as  much  as  are  his 
investments  in  machinery  and  horses.  But  if  we 
say  that  a  part  of  a  workman's  industrial  education 
is  a  productive  investment  on  which  he  draws  in- 
terest, we  must  logically  say  that  the  whole  of  his 
ability  is  such.  His  present  abilities  are  the 
product  not  only  of  his  purely  industrial  education, 
but  of  his  entire  nurture,  training,  and  education, 
first  on  the  part  of  his  parents,  and  then  perhaps, 
through  his  own  labours.  It  is  impossible  to  draw 
the  line  and  make  part  of  his  abilities  capital,  and 
the  other  part  labour.  They  must  all  be  labour,  or 
all  be  capital.  The  proper  view  is  to  look  upon  his 
entire  education  from  infancy  to  death  as  a  part  of 
his  consumption.  The  whole  of  it  results  produc- 
tively, it  is  true,  but  so  does  the  food  which  he  eats ; 
yet  it  is  a  false  view  which  identifies  the  consump- 
tion of  food  with  an  investment  of  capital.  The  man 
is  one  and  indivisible.  His  entire  personal  abilities, 
no  matter  how  develoj)ed  and  sustained,  should  be 
looked  upon  as  labour  and  not  as  capital. 

(3)  The  decisive  point  in  a  matter  of  classification 
is  the  usefulness  of  the  distinctions.  This  depends 
upon  the  standpoint  which  we  consider  most  impor- 
tant to  take.     If  we  take  the  standiDoint  of  produc- 


44  THE  DISTRIBUTION  OF  WEALTH  chap. 

tion,  it  is  perhaps  convenient  to  classify  abilities  as 
capital,  though  such  a  classification  would  be  very 
questionable ;  but  if  we  take  the  standpoint  of  dis- 
tribution, it  is  not  permissible.  Capital,  strictly 
defined,  apart  from  individual  abilities,  has  become 
the  dominating  instrument  in  the  distribution  of 
wealth.  Capital  can  be  accumulated  indefinitely 
both  in  quantity  and  duration,  while  abilities  are 
narrowly  limited.  It  is  the  ownership  of  capital 
rather  than  the  possession  of  abilities  that  has  impor- 
tant bearings  on  the  social  problems  of  wages,  inter- 
est, and  profits.  And,  most  important,  the  returns 
to  ability  follow  a  different  law  from  those  to  capital, 
and  it  is  therefore  just  as  important  to  distinguish 
labour  from  capital  as  it  is  to  distinguish  land  from 
capital. 

Section  IV.  —  Monopoly  Privileges  and  Legal  Rights. 

Neither  should  business  privileges  be  classed  as 
capital.  They  are  not  the  result  of  labour,  but  are 
social  relations;  and  the  laws  of  their  returns  are 
very  different  from  those  of  interest.  The  classifica- 
tion of  rights  and  privileges  given  in  the  table  at 
the  beginning  of  this  chapter,  and  a  discussion  of 
the  peculiarities  which  mark  their  incomes,  will 
show  how  important  it  is  from  the  standpoint  of 
distribution,  to  maintain  this  distinction.  But  first, 
in  order  to  approach  this  discussion  properl}',  it  is 
necessary  to  examine  the  basis  of  the  prime  distinc- 
tion between  private  and  social  capital. 


11  THE  FACTORS  IN  DISTRIBUTION  45 

The  most  important  and  fruitful  distinction  in  the 
theory  of  capital,  and  the  one  to  which  all  others 
must  be  subordinated,  is  that  between  cajDital  as  an 
instrument  of  production,  and  capital  as  an  instru- 
ment of  private  acquisition.  This  distinction  agrees 
with  that  between  capital  viewed  from  the  social  or 
national  standpoint,  and  capital  viewed  from  the 
private  standpoint.  The  former  standpoint  is  taken 
when  we  are  dealing  with  questions  of  i3roduction ; 
the  latter  when  dealing  with  questions  of  distribu- 
tion. It  is  the  interest  of  society  viewed  as  a  whole 
to  have  the  largest  possible  production  of  wealth. 
The  greater  the  quantity  of  utilities  i3roduced,  the 
less  will  be  their  marginal  utility  or  subjective 
value,  except  as  modified  by  improvements  in 
quality  and  variety,  but  the  greater  will  be  the 
total  utilities  and  the  total  enjoyments  of  society. 

But  the  interest  of  the  individual  is  not  directly  to 
have  a  large  production  of  all  utilities,  but  to  get  a 
large  share  of  the  utilities  produced.  His  interest 
lies  in  two  directions.  First,  it  is  to  his  interest  to 
increase  the  marginal  utility,  or  subjective  value  of 
all  goods  which  he  offers  for  sale,  and  to  have  society 
increase  the  production,  and  thereby  lower  the  mar- 
ginal utility  of  all  goods  which  it  offers  for  sale.  In 
this  way  all  other  goods  will  have  low  values  com- 
pared with  his  own,  and  he  can  command  a  larger 
share  of  the  total  social  product.  He  can  increase 
the  marginal  utility  of  his  own  goods  by  limiting 
their  supply  relatively  to  the  demands  of  society  for 


46  THE   DISTRIBUTION  OF  WEAITH  chap. 

them.  This  can  occur  only  where  he  has  a  control 
over  the  supply,  and  applies,  therefore,  only  to  more 
or  less  monopolised  products.  In  so  far  his  interests 
do  not  lie  in  harmony  with  those  of  society.  But, 
whether  or  not  he  can  limit  the  supply  of  his  own 
product,  it  is  nevertheless  in  all  cases  to  his  interest 
to  have  a  high  marginal  utility  for  his  own  product 
and  low  marginal  utilities  for  society's  products. 

Second.  Providing  he  can  keep  the  marginal 
utility  of  his  own  product  above  its  cost  of  produc- 
tion, it  is  his  interest  to  sell  as  large  a  quantity  of 
his  product  as  possible.  Here  his  interests  coincide 
with  those  of  society;  for  he  gains  in  two  ways,  first, 
by  extending  his  sales  as  far  as  possible,  that  is  by 
satisfying  the  wants  of  the  largest  possible  number 
of  individuals,  and  second,  by  lowering  his  cost  of 
production,  and  thus  again  making  possible  a  wider 
satisfaction  of  wants  at  less  cost  to  society. 

Thus  there  are  tAVO  ways  by  which  the  individual 
increases  his  share  of  the  total  product  of  society; 
first,  by  limiting  the  supply  of  his  product  so  as  to 
maintain  a  high  value,  and  second,  by  increasing  the 
sales  of  his  product  as  widely  as  possible,  consistent, 
however,  with  keeping  its  value  above  its  cost  of 
production. 

Now,  modern  industry  is  carried  on  by  entrepre- 
neurs, not  for  the  direct  satisfaction  of  their  own 
wants,  but  for  the  sake  of  sales  to  society  at  large, 
that  is,  for  the  sake  of  acquiring  from  society  as 
large  a  share  as  possible  of  the  social  product.     But 


II  THE  FACTORS  IN  DISTRIBUTION  47 

what  is  it  that  makes  it  possible  for  the  entrepre- 
neur, first,  to  limit  the  production  of  his  goods,  if 
he  enjoys  a  monopoly  privilege,  second,  to  require 
from  society  a  return  of  social  product  in  exchange 
for  his  own  product?  Plainly  it  is  the  institution 
of  private  property.  That  this  is  so  must  be  almost 
self-evident  if  we  stop  to  inquire  what  would  be  the 
distribution  of  wealth  if  all  economic  goods  were 
public  instead  of  private  property.  Supposing  the 
production  of  wealth  under  public  ownership  were 
equal  in  quantity  to  its  production  under  private 
ownership,  we  should  have  this  production  regulated, 
and  the  product  distributed,  arbitrarily  by  govern- 
ment. All  the  present  independent  proprietors  and 
entrepreneurs  would  be  simply  wage-earners  and 
salaried  employes  of  government.  Having  no  ex- 
clusive power  over  goods  involved  in  the  right  of 
property,  they  could  not  limit  the  quantity  of  their 
product  and  thus  give  it  a  high  value,  because 
government  alone  has  this  exclusive  power.  Neither 
could  they  produce  a  large  quantity  of  goods  by 
employing  labourers,  and  sell  these  goods  to  society 
in  exchange  for  society's  products,  because  society 
already  owns  these  goods  itself  through  its  agent, 
government,  having  owned  the  capital  out  of  which 
they  were  produced,  and  has  already  paid  the  would- 
be  entrepreneur  all  that  it  allows  him  in  exchange  for 
his  product,  namely,  his  stipulated  salary.  Public 
property,  then,  would  do  away  with  private  profit, 
because  the  public  would  control  the  relative  supply 


48  THE  DISTRIBUTION  OF  WEALTH  chap. 

of  goods  and  the  terms  of  exchange.  Private  profit 
must,  therefore,  rest  upon  private  property  in 
capital. 

This  proposition,  that  private  capital  is  simply 
private  property  in  capital,  can  be  demonstrated  in 
another  negative  way.  We  can  best  do  this  by 
examining  the  argument  of  Professor  Bohm-Bawerk,^ 
who  denies  this  proposition. 

Professor  Bohm-Bawerk  agrees  with  the  distinc- 
tion here  noted  in  making  the  difference  between 
private  and  social  capital  to  depend  upon  the  fact 
that  the  latter  is  looked  at  from  the  standpoint  of 
production,  the  former  from  that  of  distribution. 
But  he  maintains  that  the  fundamental  distinction 
is  not  that  between  capital  as  an  instrument  of  pro- 
duction and  private  property  in  capital.  Rather  he 
makes  the  distinction  to  lie  in  the  peculiar  part 
played  by  consumption  goods,  because  these  are  used 
for  enjoyment  and  not  for  production.  But,  though 
being  consumed,  they  are  private  capital,  because 
their  owners  use  them  as  a  means  for  the  acquisi- 
tion of  more  wealth.  Social  capital  is,  therefore, 
the  narrower  term,  and  does  not  include  "  consump- 
tion goods  which  owners  do  not  use  for  themselves, 
but  employ  by  exchange  (sale,  hire,  loan)  in  acqui- 
sition of  other  goods,  e.g.  let-houses,  lending  libraries, 
means  of  subsistence  advanced  by  undertakers  to 
their  labourers,  and  many  others."^  Neither  does 
social  capital  include  "dwelling-houses  and  other 
1  Positive  Theory  of  Capital,  Bk.  I.  2  ji^i^^  p  71. 


II  THE  FACTORS  IN  DISTRIBUTION  49 

kinds  of  buildings,  such  as  serve  immediately  for 
any  purpose  of  enjoyment  or  culture,  e.g.  theatres, 
schools,  churches,  law-courts."  Social  capital  does 
include,  of  course,  "productive  buildings  of  all 
sorts,  workshops,  factories,  sheds,  steadings,  ships, 
street-railways,  and  so  on."^ 

Professor  Bohm-Bawerk  agrees  that  the  distinc- 
tion between  capital  as  an  instrument  of  production 
and  private  property  in  capital  is  an  important  dis- 
tinction, and  one  that  needs  to  be  drawn;  but  he 
holds  it  subordinate  to  the  one  stated.  The  true 
distinction,  he  says,  is  not  between  capital  a'nd 
property  in  capital,  but  between  two  stores  of  goods. 
Social  capital,  or  productive  capital,  is  the  narrower 
store.  Private  capital,  or  acquisitive  capital,  is  the 
wider  store,  and  includes,  besides  all  social  or  pro- 
ductive capital  which  is  subject  to  private  owner- 
ship, also  those  consumption  goods  which  are  sold 
or  leased  by  their  owners  for  a  profit.  Private  capi- 
tal is  "  a  group  of  products  which  serve  as  means  to 
the  acquisition  of  goods."  This  acquisition  is  mainly 
through  exchange,  and  is  alwa3^s  through  exchange 
where  consumption  goods  are  concerned.  Consump- 
tion goods,  he  asserts,  are  private  capital  only  where 
they  are  not  used  hy  the  oivners  themselves,  but  are 
employed  in  exchange.  Thus  a  dwelling-house  is 
in  no  case  social  capital.  When  used  by  its  owner, 
it  is  not  capital,  but  consumption  goods;  but  when 
leased  by  its  owner,  it  is  private  capital. 

1  Positice  Theorij  of  Capital,  Bk.  I.,  p.  66. 


50  THE  DISTRIBUTION   OF  WEALTH  chap. 

But  while  private  capital  is  used  to  acquire  goods 
mainly  through  exchange,  there  may  be  an  acquisition 
which  comes  direct  to  the  owner  through  production ; 
as  when  his  own  orchard  yields  him  fruit  which  he 
himself  consumes,  or  when  he  produces,  for  his  own 
use,  shoes  or  clothing  in  his  workshop. 

Thus  private  capital  enables  its  owner  to  acquire 
goods  either  through  exchange  or  through  produc- 
tion —  the  latter,  however,  only  when  the  private 
capital  is  at  the  same  time  production  goods. 

It  will  be  seen  that  the  foundation  relied  upon  by 
Professor  Bohra-Bawerk  for  overthrowing  the  prop- 
osition that  private  property  is  the  distinguishing 
mark  between  social  and  private  capital,  is  the  deep 
significance  which  he  attaches  to  the  antithesis  be- 
tween productive  capital  and  consumption  goods. 
It  behooves  us,  then,  to  examine  minutely  into  the 
nature  of  consumption  goods,  and  to  determine  where 
the  line  shall  be  drawn  between  consumption  goods 
and  productive  goods.  If  it  should  appear  from  a 
legitimate  analysis  that  those  goods  which  he  calls 
consumption  goods,  and  which  are  private  capital 
only  because  used  in  exchange,  are  really  also  pro- 
ductive goods  used  in  the  creation  of  additional  utili- 
ties, then  it  would  follow  that  private  and  social 
capital  are  identical  so  far  as  the  store  of  goods 
is  concerned,  and  the  only  distinction  remaining 
between  the  two  is  that  based  on  private  property 
in  capital. 

Consumption  goods  are  of  two  kinds,  transient  and 


II  THE   FACTORS   IN  DISTRIBUTION  51 

durable.  The  former  are  wholly  consumed  in  a  short 
period  of  time,  as  food;  the  latter  persist  through 
years  and  decades,  as  houses. 

1.  Transient  consumption  goods.  —  It  is  admitted  by 
Professor  Eohm-Bawerk  that  "  finished  consumption 
goods  in  the  hands  of  producers  and  merchants  (as 
warehouse  stock) "  are  social  capital.  It  seems 
strange  that  he  should  stop  at  this  point,  and  fail  to 
prolong  the  productive  nature  of  his  finished  con- 
sumption goods.  If  they  are  productive  goods  in 
the  hands  of  merchants,  when  do  they  cease  to  be 
productive,  and  become  consumption  goods?  We 
need  to  bear  constantly  in  mind  the  nature  of  pro- 
duction. ^  It  is  using  the  material  of  nature  to 
create  form-,  place-,  and  time-utilities.  So  long  as 
these  utilities  are  being  added  to  the  elementary 
utilities,  the  material  of  nature  remains  capital,  and 
not  consumption  goods.  The  transition  from  capi- 
tal to  consumption  goods  does  not  occur  when  their 
transfer  is  made  from  the  manufacturer  or  merchant 
to  the  consumer,  as  one  would  infer  from  the  phrase- 
ology of  Bohm-Bawerk  and  the  classical  writers ;  but 
it  occurs  only  ivJien  utilities  cease  to  he  added  to 
the  material  and  the  consumer  is  actually  using  up 
the  product.  The  consumer  of  meat  is  himself  a 
time-,  place-,  and  form-producer,  when  he  goes  to 
the  store,  brings  home  his  meat  (time  and  place), 
gives  it  to  his  wife,  who  cooks  it  (form),  and  brings 
it  to  the  table  at  meal-time  (time  and  place).     Up  to 

1  See  above,  pp.  27,  20. 


52  THE  DISTRIBUTION  OF  WEALTH  chap. 

the  time  when  he  receives  the  meat  ready  for  con- 
sumption it  is  social  capital,  because  utility  is  still 
being  added  to  it.  It  is  social  capital  in  the  hands 
of  the  consumer  himself  and  his  family  as  long  as  it 
is  being  prepared  for  their  use.  His  wife  is  a  pro- 
ductive labourer  as  well  as  he.  Food  is  social  capital 
while  it  is  being  prepared,  cooked,  and  placed  on  the 
table;  it  ceases  to  be  such  only  when  it  has  reached 
its  maximum  utility,  i.e.  when  it  is  at  the  place  and 
the  time  and  in  the  form  necessary  to  supply  the 
wants  of  the  actual  consumer.  Only  then  does  it 
become  consumption  goods. 

The  line  apparently  should  be  drawn  at  the  point 
where  the  consumer  begins  to  enjoy  the  food.  If  we 
have  a  proper  view  of  consumption  we  shall  not 
make  the  mistake  of  pressing  the  above  argument  too 
far  and  holding  that  the  mastication  of  food  is  also 
productive  labour.  Such  a  view  would  maintain  that 
the  ultimate  utility  of  food  is  only  the  physiological 
one  of  digestion,  whereas,  for  the  economist  it  is  the 
psychological  one  of  enjoyment.  The  same  is  true 
of  all  other  consumption  goods.  They  cease  to  be 
social  capital  as  soon  as  the  consumer  begins  to  enjoy 
them. 

Likewise,  it  can  be  shown  that  consumption  goods 
are  social  capital  when  they  are  used  by  the  employer 
in  the  payment  of  wages.  The  employer  pays  his 
workmen  either  in  money  or  in  consumption  goods. 
1.  If  he  pays  in  money,  it  is  agreed  that  he  pays 
in  what  is  social  capital.     Money  is   social  capital 


II  THE  FACTORS  IN  DISTRIBUTION  53 

because  it  facilitates  division  of  labour,  and  hence 
increases  the  productivity  of  the  community.  2.  If 
the  employer  pays  in  consumption  goods,  such  as 
food,  groceries,  clothing,  he  simply  takes  the  place 
of  the  retail  dealer,  and  the  consumption  goods  are 
social  capital  for  the  same  reason,  and  just  as  much 
as  when  they  were  in  the  hands  of  the  dealer.  Like 
the  retail  dealer,  he  adds  time-  and  place-utility  to 
his  goods  up  to  the  time  when  he  delivers  them  over 
to  his  emploj'es. 

This  distinction  is  very  different  from  that  of  the 
English  economists  and  Wagner,  who  put  "the 
maintenance  of  productive  labourers  "  under  social 
capital.  They  considered  this  to  be  capital  because 
it  was  so  much  investment  which  brought  as  a 
return  the  products  of  these  labourers.  Labourers 
were  considered  as  themselves  a  kind  of  fixed 
capital,  and  subsistence  AA^as  circulating  capital. 
The  two  together  produced  an  increase  of  utilities. 
,This  view  can  apply  only  to  slave  labour.  The  free 
labourer  is  not  capital,  and  his  subsistence  is  not 
capital.  It  is  consumption  goods,  used  for  his 
own  enjoyment.  This  is  their  ultimate  destination. 
Here  the  purpose  of  production  ceases.  Its  object 
has  been  attained,  and  that  is  the  end  of  it.  The 
reason  why  consiunptioyi  goods  are  capital  is  not 
because  they  are  co)isiuned  hy  productive  lahourers, 
but  because  they  are  haviny  further  utilities  added  to 
them,  i.e.  because  they  are  not  yet  consumption 
goods.      As    soon    as    they  cease    to   have    utilities 


54  THE  DISTRIBUTION  OF  WEALTH  chap. 

added,  tliey  cease  to  be  capital;  they  become 
consumption  goods,  and  are  at  once  used  up  and 
destroyed. 

2.  Durable  consumption  goods.  Consumption  goods 
which  are  durable  are  also  social  capital,  because 
they  are  the  basis  for  the  creation  of  further  utilities. 
Bohm-Bawerk  1  excludes  from  social  capital  "dwell- 
ing-houses and  other  kinds  of  buildings,  such  as 
serve  immediately  for  any  purjDose  of  enjoyment  or 
culture,  e.g.  theatres,  schools,  churches,  law  courts." 
He  includes  "  productive  buildings  of  all  sorts,  work- 
shops, factories,  sheds,  steadings,  ships,  street-rail- 
Avays,  and  so  on." 

It  is  agreed  that  a  factory  or  bake-shop,  for  exam- 
ple, is  social  capital,  because  it  is  a  means  for  pro- 
ducing goods  or  utilities.  But  a  dwelling-house  is 
capital  for  the  same  reason,  or  a  theatre.  The  only 
difference  is  that  the  utilities  that  are  made  in  a 
bake-shop  are  given  a  substantial  material  form 
which  can  be  transported  and  consumed  elsewhere^ 
A  dwelling-house  serves  for  the  creation  of  various 
kinds  of  utilities.  First  is  shelter  and  warmth, 
which  is  a  utility  that  can  be  consumed  only  in 
connection  with  the  plant  that  produces  it.  Second 
is  the  preparation  and  serving  of  food,  which  can  be 
carried  on  successfully  only  under  cover,  where 
stoves  can  be  erected,  wood  and  coal  can  be  stored, 
and  chimne3^s  can  carry  off  the  smoke.  Third  is  the 
storing  and  the  final  exertions  in  preparing  clothing 

1  Positive  Theory  of  Capital,  Bk.  I.,  p.  06. 


II  THE   FACTORS  IN  DISTRIBUTION  55 

for  the  wearers,  such  as  washing  and  ironing.  Now, 
if  all  these  activities  were  carried  on  in  a  factory,  or 
workshop,  or  in  a  hotel,  it  would  not  be  difficult  to 
see  that  such  buildings  were  not  only  private,  but 
also  social  capital.  And  unless  we  insist  that  the 
work  of  women  in  the  household  is  unproductive,  we 
must  allow  that  the  implements,  the  stoves,  the  fuel, 
and  also  the  buildings  which  are  the  indispensable 
accompaniments  of  their  productive  labour,  are  social 
capital.  Even  the  utility  shelter  itself,  the  one 
utility  which  is  inseparable  from  the  building,  and 
could  not  be  produced  at  a  factory  and  shipped  to 
the  consumer,  even  this  utility  is  a  product  of  labour 
in  connection  with  capital,  viz.,  the  labour  of  repair, 
which  is  necessary  to  keep  the  building  from  falling 
into  decay. 

The  validity  of  this  point  may  be  further  demon- 
strated by  comparing  capital  with  labour.  Labour 
satisfies  human  wants  in  two  ways :  First,  indirectly, 
by  making  some  material  product  which  the  con- 
sumer then  uses  up,  as  a  hat  or  a  book;  second, 
directly,  by  performing  some  service,  which  yields 
a  direct  satisfaction.  Now,  consumption,  as  a  phe- 
nomenon of  Political  Economy,  is  defined  as  the 
using  up  or  destruction  of  a  utility  in  the  process  of 
satisfying  human  wants.  The  definition  is  not  liter- 
ally broad  enough.  It  ought  to  include  the  enjoy- 
ment of  services  as  well  as  the  enjoyment  of  material 
goods.  Services,  in  the  economic  sense,  are  con- 
sumed directly  without  the  mediation  of  a  material 


56  THE  DISTRIBUTION  OF  WEALTH  chap. 

product.  Products,  themselves,  may  be  looked  upon 
as  the  material  embodiment  of  services.  It  is  the 
service  rather  than  the  product  which  is  consumed. 
The  book  which  I  purchase  and  read  is  the  material 
embodiment  of  the  abilities  of  its  author.  But  the 
author  may  deliver  the  same  thoughts  to  me  directly 
in  the  form  of  lectures.  In  either  case,  I  should 
consume  the  product  of  his  labours. 

In  a  similar  way  durable  capital  may  satisfy  human 
wants  indirectly  or  directly.  In  a  factory,  by  the  aid 
of  labour,  a  material  product  is  made,  and  this  prod- 
uct is  carried  by  labour  and  capital  to  the  consumer. 
Thus,  form-,  place-,  and  time-utilities  are  given 
to  the  material  of  nature,  and  capital  and  labour 
satisfy  human  wants  indirectly  through  the  medium 
of  this  material.  But  capital,  as  well  as  labour, 
may  satisfy  wants  directly,  as  when  a  house  produces 
the  utility,  shelter.  What  is  here  consumed  by  man 
is  not  a  material  good,  but  a  U8e  or  a  service  of 
capital.  There  are  two  ways  in  which  durable  goods 
are  destroyed;  first,  by  man's  using;  second,  by  that 
"complex  of  destructive  surroundings "  which  we 
call  time.  When  a  dwelling-house  is  constructed, 
something  is  made  which  affords  utility  not  for  one 
sitting  only,  but  keeps  giving  off  the  utility,  shelter, 
indefinitely.  The  forces  of  nature  —  attraction,  cohe- 
sion—  are  here  producing  utilities  for  man's  benefit, 
just  as  much  as  do  other  forces,  heat,  electricity, 
and  vital  forces,  in  other  industries.  We  may  say 
that  this  utility,  shelter,   is    consumed,    but  we  do 


II  THE  FACTORS  IN  DISTRIBUTION  57 

not  strictly  say  that  the  building  is  consumed.  It 
is  gradually  destroyed  through  the  wear  and  tear  to 
which  it  is  subjected,  the  breaking  of  glass,  hinges, 
doors,  etc.  The  same  destruction  occurs  with  a 
factory  and  machinery,  and  is  there  known  as  de- 
preciation. A  dwelling-house  may  be  looked  upon 
not  only  as  active  capital,  creating  the  utility, 
shelter,  but  also  partly  as  passive  capital,  receiving 
additions  of  utility  through  applications  of  labour. 
The  depreciation  of  a  dwelling-house,  and  the 
constant  reproduction  of  the  utility,  shelter,  are 
accompanied  by  productive  labour  just  as  truly 
as  is  the  production  of  commodities  with  machin- 
ery. The  labour  of  repairing  a  factory  is  produc- 
tive, and  so  is  that  of  repairing  a  dwelling-house, 
because  it  creates  new  utilities  in  conjunction  with 
the  fixed  capital,  the  building.  Circulating  or 
passive  capital  is  used  in  making  these  repairs,  and 
when  this  is  incorporated  in  the  building,  it 
becomes  fixed  and  active  capital. 

Taking  all  these  facts  and  principles  into  consid- 
eration, there  seems  to  be  as  much  reason  for 
designating  durable  consumption  goods,  including 
dwelling-houses,  as  social  capital  as  there  is  for 
calling  a  factory  social  capital.  The  same  is 
true  of  theatres.  Here  a  utility  is  produced 
which  is  inseparable  from  the  building.  We 
are  right  in  holding  that  actors  are  productive  labour- 
ers, because  they  produce  something  that  satisfies  a 
human  want.     But  if  actors  are  productive,  theatres 


58  THE  DISTRIBUTION  OF  WEALTH  chap. 

are  plainly  the  capital  without  which  they  could  not 
produce  their  characteristic  utility. 

Likewise  teachers  produce  the  utility  education 
and  mental  training,  and  school  buildings  are  their 
capital.  Churches  are  the  social  capital  for  the  pro- 
duction of  the  utility,  worship,  and  law  courts  for 
the  utilities,  security  and  appropriability  of  prop- 
erty. 

Consequently  the  conclusion  seems  plain  that 
social  capital  is  identical  with  private  capital  so  far 
as  concerns  the  material  instruments  which  it  in- 
cludes. There  does  not  exist  the  antithesis  between 
"means  of  production"  and  "means  of  consump- 
tion," which  Professor  Bohm-Bawerk  insists  upon.i 
"  Means  of  consumption "  strictly  defined,  consist 
only  of  tliose  goods  which  are  actually  being  con- 
sumed. Means  of  production  include,  first,  all  those 
transient  consumption  goods  which  are  destined  for 
co7isumption,  but  are  yet  receiving  additions  of  form-, 
place-,  and  time-utilities  ;  second,  all  so-called  durable 
consumption  goods,  even  when  they  are  being  destroyed 
and  used  up  by  man,  and  subjected  to  other  causes  of 
dejjreciation  ;  third,  auxiliary  capital,  fixed  and  circu- 
lating. 

Since  the  "store  of  goods  "  in  private  capital  is 
identical  with  the  "store  of  goods"  in  social  capital, 
we  need  to  base  the  distinction  between  capital  as  a 
means  of  production,  and  capital  as  a  means  of 
acquisition,  on  some  other  foundation.     It  remains 

1  p.  67. 


II  THE  FACTORS  IN  DISTRIBUTION  59 

to  be  shown  definitely  that  private  property  is  the 
means  for  the  private  acquisition  of  economic  goods, 
whether  this  be  through  actual  production  for  his 
own  use  on  the  part  of  the  owner  of  capital,  or 
through  sales,  leases,  and  loans,  where  acquisition 
comes  through  exchange,  and  production  is  for  the 
benefit  of  others. 

Section  V.  —  Lmv  and  Mights. 

The  place  of  law  in  Political  Economy  is  a  sub- 
ject which  has  received  from  English  economists  no 
attention  at  all  commensurate  with  its  far-reaching- 
importance.  The  reason  for  this  is  mainly  a  lack  of 
historical  investigation.  A  comparison  of  different 
countries  and  of  different  times  would  show  the 
influence  of  legal  regulations.  The  English  econ- 
omists have  taken  the  laws  of  private  property  for 
granted,  assuming  that  they  are  fixed  and  immutable 
in  the  nature  of  things,  and  therefore  needed  no 
investigation.  But  such  laws  are  changeable — ^they 
differ  for  different  peoples  and  places,  and  they  have 
profound  influence  upon  the  production  and 
distribution  of  wealth. 

The  modern  economic  system  depends  upon  the 
independent  enterprise  of  free  individuals  as  con- 
trasted with  the  public  management  of  business  by 
the  community  or  the  government.  This  private 
enterprise  takes  the  form  of  either  the  independent 
activity  of  a  single  individual,  or  the  associated  activ- 
ities of  individuals  in  partnerships  and  corporations. 


60  THE  DISTRIBUTION  OF  WEALTH  chap. 

The  decisive  characteristics  of  industry  under  the 
regime  of  private  enterprise  are,  Division  of  Labour, 
Exchange  of  Products,  Credit,  Self-Interest,  and 
Competition.  These  characteristics  are  becoming 
yearly  more  widely  extended  and  fundamental. 
There  is  to-day  a  minute  division  of  labour,  whereby 
an  individual's  wants  are  supplied  by  millions  of 
other  people,  working  in  more  or  less  harmony; 
and  in  turn,  the  producer  of  wealth  depends  upon 
millions  of  other  people  for  the  recompense  of  his 
work.  Out  of  this  world-wide  division  of  labour 
has  grown  the  transfer  and  exchange  of  products, 
and,  as  a  necessary  consequence,  the  system  of 
credit.  Every  one  of  these  characteristics  involves 
the  profound  dependence  of  man  upon  his  fellow- 
man.  Social  relations  are  growing  more  and  more 
important.  In  order  that  industry  may  be  carried 
on  at  all  under  such  complex  relations,  there  must 
be  a  very  definite  understanding  by  every  individual 
as  to  what  he  may  expect  from  others,  and  what 
he  must  do  in  turn  for  others.  Nothing  can  be 
left  to  chance,  fraud,  or  force.  Industry  would  be 
impossible,  or  would  revert  to  primitive,  cumber- 
some, and  isolated  forms  under  such  conditions. 
Consequently,  there  must  be  found  somewhere  a 
supreme  authority,  with  power  to  define  and  enforce 
the  rights  and  duties  of  individuals.  It  is  not 
always  so  important  that  these  rights  and  duties 
be  based  upon  ideas  of  justice  as  that  they  be 
certain.     There  must  be  no  room  for  the  arbitrary 


II  THE   FACTORS  IN  DISTRIBUTION  61 

rulings  of  individuals.  This  indicates  the  necessity 
for  law  and  government.  Thus  there  are  in  society- 
two  lines  of  economic  activity,  the  voluntary  activity 
of  individuals  and  associations,  and  the  compulsory 
activity  of  government.  The  first  is  the  field  of  free 
competition  and  self-interest ;  the  one  hitherto  solely 
treated  by  the  English  economists.  The  second  is 
the  field  of  coercion, —  of  force. 

The  necessity  of  a  sovereign  power  employing  force 
is  shown  by  the  following  facts :  — 

1.  Private  self-interest  is  too  powerful,  or  too 
ignorant,  or  too  immoral  to  promote  the  common 
good  without  compulsion. 

2.  The  common  wants  of  society — justice,  roads, 
military  defence,  etc. — 'Can  be  supplied  only  by  com- 
pulsory contributions  from  individuals,  and  compul- 
sory administration  of  government. 

Law  is  the  expression  not  of  the  whole  society,  but 
of  the  sovereign  element  or  social  class.  It  is  im- 
posed simply  by  virtue  of  the  might  residing  in  gov- 
ernment. "  The  most  obvious  characteristic  of  law  is 
that  it  is  coercive.  .  .  .  Even  when  it  operates  in 
favor  of  the  legitimate  action  of  individuals,  it  does 
so  by  restraining  any  interference  with  such  action."  ^ 

At  the  same  time,  laws  are  not  the  fortuitous  and 
blind  coercion  of  nature.  There  are  always  human 
purposes  underlying  the  enactment  of  laws,  and  these 
are  the  purposes  of  whatever  may  be  the  ruling 
political  class  at  the  given  time,  and  in  the  given 

1  Holland,  p.  G7. 


62  THE  DISTRIBUTION   OF  WEALTH  chap. 

country.      These  may  be  good  or  bad.     Historically 
considered,  they  may  be  classed  as  follows :  — 

1.  The  determination  of  the  ruling  classes  to 
exploit  other  classes,     (e.^.  Land  laws  of  England.) 

2.  The  desire  of  the  ruling  classes  to  realise  cer- 
tain ethical  and  political  ideals.  (Factory  legisla- 
tion, prohibitory  liquor  laws,  universal  suffrage,  etc.) 

3.  The  desire  of  the  ruling  classes  to  facilitate  or 
suppress  the  industry  of  the  country.  (Laws  of 
contract,  taxation,  etc.  Laws  against  oleomarga- 
rine, etc.) 

The  primary  function  of  law  is  to  create  and  de- 
fine legal  rights.  "A  right  (in  general)  is  one 
man's  capacity  of  influencing  the  acts  of  another,  by 
means  not  of  his  own  strength,  but  of  the  opinions 
and  the  force  of  society." ^  A  legal  right  is  "a  ca- 
pacity residing  in  one  man  of  controlling,  with  the 
assent  and  assistance  of  the  state,  the  actions  of 
others.  That  which  gives  validity  to  a  legal  right  is, 
in  every  case,  the  force  which  is  lent  to  it  by  the 
state.  "2 

The  purpose  of  law  with  reference  to  rights  is  two- 
fold: First,  it  defines  or  creates  them.  They  are  of 
two  kinds,  antecedent  and  remedial.  Antecedent 
rights  are  the  ultimate  primary  rights  towards  which 
remedial  rights  are  directed.  They  are  rights  where 
an  act  is  "due  for  its  own  sake,"  while  in  remedial 
rights  the  act  is  "  due  merely  on  default  of  another 
act."^     Li  these  two  senses  law  is    "substantive." 

1  Holland,  p.  70.  2  /ftj^^.  3  Holland,  p.  128. 


II  THE  FACTORS  IN  DISTRIBUTION  63 

Second,  law  provides  a  method  of  aiding  and  protect- 
ing substantive  rights.  This  is  "adjective  law,  or 
Procedure." 

"Remedial  or  sanctioning  rights  are  merely  part 
of  the  machinery  provided  by  the  state  for  the  redress 
of  injury  done  to  antecedent  rights. "  ^  Adjective 
law  determines  the  mode  in  which  the  support  of  the 
state  may  be  secured  in  order  to  the  realisation  of  a 
remedial  right.  Remedial  rights  and  adjective  law 
are  concerned  with  the  enforcement  of  rights.  From 
the  standpoint  of  the  law  practitioner,  they  are  more 
important  than  the  definition  of  rights  proper.  His 
interest  lies  in  the  violation  and  enforcement  of 
rights.  Remedial  rights  spring  into  being  only 
when  the  primary  ones  are  violated.  Adjective  law 
involves  all  those  weighty  questions  which  are  con- 
cerned with  the  organisation  and  jurisdiction  of 
courts;  the  duties  of  judges,  sheriffs,  and  other 
public  officers;  the  indictments,  summonses,  plead- 
ings, evidence,  decisions,  precedents,  judgments, 
appeals ;  and  the  execution  of  the  judgment,  whereby 
the  physical  force  of  the  state  is  set  in  motion 
through  appropriate  state  officers  to  carry  the  judg- 
ment into  effect.  All  these  matters  are  of  utmost 
importance,  because  they  are  the  steps  for  the  physi- 
cal enforcement  of  rights ;  and  a  right  without  provi- 
sions for  its  physical  enforcement  by  government  is 
onl}^  a  moral  and  abstract  right,  not  a  legal  and  ser- 
viceable one.     But  to  the  economist,  remedial  rights 

1  Holland,  p.  128. 


64  THE  DISTRIBUTION  OF  WEALTH  chap. 

and  adjective  law  are  of  interest  for  different  reasons 
than  to  the  lawyer.  The  former's  interest  in  them 
lies  in, — 

1.  The  fact  that  before  the  creation  of  legal  tribu- 
nals and  regular  forms  of  procedure,  private  warfare 
and  anarchy  characterised  the  attempts  to  enforce 
rights ;  ^'.  e.  rights  were  moral  but  not  legal,  depend- 
ing upon  custom  rather  than  authoritative  definition 
and  enforcement. 

2.  The  failures  and  defects  of  procedure,  whereby 
the  substantive  rights  of  individuals  and  society  are 
not  enforced. 

3.  "  The  manner  in  which  the  tribunals  have  con- 
trived, from  time  to  time,  to  effect  changes  in  the 
substance  of  the  law  itself,  under  cover  of  merely 
modifying  the  methods  by  which  it  is  enforced."  ^ 

The  interest  of  the  economist  lies  further  back  than 
the  enforcement  of  rights.  It  lies  in  the  creation 
and  definition  of  primary  rights.  This  is  substantive 
law  proper.  Here  we  are  concerned  with  the  analy- 
sis of  rights,  their  purposes,  and  their  effects  on 
society  and  industry, 

A  legal  right  exists  where  one  course  of  action  is 
approved  and  enforced,  and  another  course  is  disap- 
proved and  prohibited  by  that  organised  society,  "  the 
state."  An  analysis  of  such  a  right  shows  it  to  be 
the  result  of  the  following  elements  :  —  ^ 

1.    The   Person   Entitled. — "A  person 'in  whom 

1  Holland,  p.  305. 

2  Holland,  Chap.  VIII. 


II  THE   FACTORS  IN  DISTRIBUTION  65 

the  right  resides,'  or  who  is  'clothed  with  the  right," 
or  who  is  benefited  by  its  existence. 

2.  The  Object.  —  In  the  case  of  property  rights,  an 
object  over  which  the  right  is  exercised. 

3.  The  Act  or  Forbearance. — "Acts  or  forbear- 
ances which  the  person  in  whom  the  right  resides  is 
entitled  to  exact. 

4.  The  Person  Obliged.  —  "A  person  from  whom 
these  acts  or  forbearances  can  be  exacted;  in  other 
words,  against  whom  the  right  is  available ;  in  other 
words,  whose  duty  it  is  to  act  or  forbear  for  the  bene- 
fit of  the  subject  of  the  right." 

Bearing  in  mind  these  constituent  elements  of  a 
right,  we  may  proceed  to  the  examination  in  turn  of 
personal  and  property  rights. 

Section  VI.  —  Personal  Rights. 

In  the  analysis  of  the  factors  of  distribution 
which  has  been  made  up  to  this  point,  personal 
abilities,  including  the  whole  of  man's  intellectual, 
moral,  and  physical  powers,  have  been  marked  off 
as  one  of  the  great  factors  in  the  private  acqui- 
sition of  wealth.  But  personal  abilities,  in  and  of 
themselves,  can  do  no  more  than  produce  wealth. 
They  are  the  agents  whereby  man  changes  the  place 
and  arrangement  of  external  objects  of  nature,  in 
order  that  the  forces  and  energies  of  nature  may 
operate  in  such  new  ways  as  to  satisfy  human 
wants.  In  this  way  utilities  are  created.  But  how 
shall  it  be  determined  who  shall  enjoy  these  utili- 


66  THE  DISTRIBUTION  OF  WEALTH  chap. 

ties?  A  slave  may  produce  utilities,  but  he  has 
no  legal  right  which  enables  him  to  enjoy  them.  As 
soon  as  they  are  produced,  it  is  the  right  and  power 
of  some  one  else  to  take  them  from  him,  and  to  use 
them  for  one's  own  enjoyment  or  disposal.  The  right 
to  do  this  is  based  on  a  right  of  private  property  in 
the  slave.  But  a  freeman  is  recognised  by  the  law 
as  having  rights  in  himself  for  the  free  production, 
acquisition,  and  enjoyment  of  wealth.  The  state 
guarantees  and  enforces  these  rights  against  the 
world. 

Personal  rights  in  our  day  and  country  have  be- 
come so  generally  recognised  that  they  are  taken  as  a 
matter  of  course,  and  it  is  difficult  to  realise  their 
essentially  legal  character.  Yet  if  we  examine  them 
historically,  we  find  a  time  when  they  were  not 
recognised.  Such  an  examination  will  show  us,  too, 
the  significance  which  these  rights  have  for  the 
private  acquisition  of  wealth. 

Personal  rights  may  be  classified  as  those  of  life, 
liberty,  employment,  and  marriage.  The  interest  of 
the  economist  in  these  is  to  determine  the  influence 
they  have  in  affording  individuals  a  share  in  the 
social  income. 

The  primary  and  fundamental  personal  right  is  the 
right  to  life.  If  the  state  guarantees  this  in  its 
fulness,  the  state  must  furnish  the  individual,  not 
only  with  protection  against  the  unlawful  violence 
of  his  fellow-men,  but  also  with  a  share  of  the  social 
product  equal  to  his  minimum  of  subsistence.     And 


n  THE   FACTORS  IN  DISTRIBUTION  67 

this  is  what  the  state  has  clone  in  two  ways,  through 
slavery  and  poor-relief;  the  first  for  the  slave  and 
serf,  the  second  for  the  freeman. 

In  primitive  times  the  right  to  life  was  not  only 
not  recognised,  it  was  not  imagined.  Enemies  were 
slaughtered  as  a  matter  of  course,  like  wild  animals. 
There  was,  indeed,  a  mutual  protection  of  life  within 
the  clan  and  tribe;  but  this  was  not  based  on  any 
ideas  of  the  rights  of  man  as  such,  or  the  dignity  of 
human  beings,  but  simply  upon  common  origin, 
common  worship,  and  common  need  of  military  de- 
fence. It  was  very  little  above  the  mutual  recogni- 
tion of  rights  among  a  pack  of  wolves.  Even  in 
their  own  tribe  and  clan,  old  and  decrepit  people, 
the  sick  and  feeble,  the  defective  infants,  were  ex- 
posed and  abandoned,  simply  because  they  were  a 
burden  instead  of  a  help. 

The  recognition  of  new  rights  is  not  simply  a 
matter  of  the  growth  of  abstract  ethical  ideas ;  it  is 
first  of  all  an  outcome  of  new  economic  conditions. 
It  requires  a  wealthy  and  well-ordered  society  for  the 
realisation  of  the  highest  ideals  of  all-rounded  human 
rights,  and  it  is  economic  privations  that  are  the 
prime  causes  for  their  withholding.  When  these 
privations  are  overcome  by  an  accumulation  of 
wealth,  and  the  ruling  classes  have  thus  other  re- 
sources for  the  satisfaction  of  their  wants,  then  it  is 
possible  for  new  wants  of  the  lower  classes  to  be 
recognised.  And  the  ruling  classes,  themselves, 
ultimately  gain  more  than  they  lose  by  the  recogni- 
tion of  these  rights. 


68  THE  DISTRIBUTION  OF  WEALTH  chap. 

This  was  the  way  in  which  the  right  to  life  came 
first  to  liave,  not  ethical  and  theoretical  recognition, 
for  that  was  an  afterthought,  but  practical  enforce- 
ment. Slavery  was  substituted  for  slaughter.  The 
introduction  of  slavery  marked  a  long  advance-step 
in  human  civilisation.  It  laid  the  foundation  for 
the  recognition  of  the  right  of  life  for  the  lowest  of 
men.  And  this  in  two  ways.  First:  Slavery  first 
made  possible  the  production  of  wealth  in  abun- 
dance, so  that  there  could  be  a  regular  supply  of 
goods  for  the  satisfaction  of  wants.  This  did  away 
with  the  primitive  alternatives  of  starvation  and  can- 
nibalism. Without  slavery  it  is  doubtful  whether 
restless,  nomadic  peoples  could  have  made  the  transi- 
tion from  a  hunting  and  pastoral  life  to  a  sedentary, 
agricultural  life.  Only  the  direful  lash  of  the  over- 
seer could  cower  the  wild  barbarian  into  a  plodding, 
spiritless  ploughman.  Thus  it  became  possible  for 
ancient  civilisations  to  spring  up,  where  the  citizen 
class  had  leisure  for  developing  the  higher  depart- 
ments of  life.  Three-fourths  of  the  population  of 
Greece  were  slaves,  and  there  could  have  been  no 
Sophocles  or  Erapedocles,  no  Praxiteles,  Socrates, 
Plato,  or  Aristotle,  had  not  thousands  of  slaves  in 
the  fields  and  the  houses  been  caring  for  their  bodily 
wants. 

Second :  Slavery  made  it  the  direct  interest  of  the 
ruling  classes  to  preserve  the  lives  of  their  slaves, 
and  to  furnish  them  with  a  regular  supply  of  their 
wants,  equal,  at  least,  to  their  minimum  of  subsist- 


II  THE  FACTORS  IN  DISTRIBUTION  69 

ence.  The  slave  had  the  right  of  life  against  all  the 
world  except  his  master.  Thus  the  slaves  were 
themselves  better  off  than  when  free.  Instead  of 
living  like  savages,  slaves  to  nature  and  the  seasons, 
they  now  had  a  regular  provision  all  the  year  round. 
And  their  life  was  seldom  so  burdened  with  anguish 
as  is  that  of  thousands  of  the  tenement-house  and 
work-house  poor  in  our  day.  The  prodigal  son  did 
not  ask  to  be  made  a  slave  in  his  father's  house  — 
lie  was  too  humble  for  that  —  he  asked  the  very 
meanest  place  —  that  of  a  hired  servant.  The  slave 
had  the  right  to  life  and  personal  security,  the  hired 
servant  had  not  this  most  precious  of  rights. 

But  in  modern  times,  when  slaverj^  and  serfdom 
have  been  abolished,  the  right  to  life  has  found  a  new 
recognition,  the  public  poor-relief.  This  has  taken 
two  forms,  both  based  upon  the  attempt  of  govern- 
ment to  provide  a  minimum  of  subsistence  —  out- 
door and  in-door  relief.  As  to  the  merits  and  de- 
merits of  the  two  forms  we  are  not  here  concerned. 
We  have  but  to  note  the  circumstances  which  have, 
in  modern  times,  given  rise  to  this  attempt  of  the 
state  to  guarantee  the  right  to  life.  The  circum- 
stances are  these :  — 

1.  The  freedom  of  the  labourer. 

2.  His  inability  to  engage  in  productive  labour,  or 
lack  of  employment. 

3.  Fear  on  the  part  of  the  ruling  classes  of  popular 
uprisings,  as  in  the  English  poor  laws  at  the  time  of 
the  French  Revolution. 


70  THE   DISTRIBUTION   OF  WEALTH  chap. 

4.  Ethical  ideas  regarding  the  sacredness  of  life. 

5.  Great  accumulations  of  wealth,  making  possible 
generous  provision  for  the  dependent. 

With  the  right  to  life  thus  recognised  by  law  and 
enforced  by  government,  we  find  that  the  labourer  — 
i.e.  the  man  who  has  nothing  but  personal  abilities 
for  acquiring  and  producing  goods  —  is  guaranteed 
a  share  of  the  social  income  equal,  at  least,  to  his 
minimum  of  subsistence.  This  is  the  fundamental 
and  absolute  right  in  its  influence  upon  the  distribu- 
tion of  wealth.  We  have  next  to  inquire  into  those 
personal  rights  which  enable  the  labourer  to  get,  be- 
sides the  minimum  of  animal  subsistence,  also  the 
highest  possible  share  of  the  social  product  in  re- 
turn for  the  use  of  his  personal  abilities.  These 
rights  may  be  grouped  under  the  common  name, 
liberty. 

The  right  to  liberty  is  not  a  single  right,  but  a 
bundle  of  rights.  It  includes  many  separate  ones 
which  have  been  classed  by  various  writers  as  inde- 
pendent. Among  the  most  important  of  these  are 
the  right  to  free  motion  and  locomotion;  rights  to 
the  uses  of  the  free  gifts  of  nature,  air,  sunlight, 
water;  rights  of  free  contract,  free  industry,  free 
belief  and  worship,  free  speech  and  publication ;  the 
right  to  equality,  and  the  right  to  marriage.^  The 
right  to  property  is  also  a  species  of  liberty.  There 
might  be  added,  the  right  to  an  education  furnished 
by  the  state. 

1  See  Herbert  Spencer,  Justice.,  New  York,  1891. 


II  THE  FACTORS  IN  DISTRIBUTION  71 

The  economist  looks  upon  these  rights  from  two 
standpoints. 

I.  The  production  of  wealth.  Rights  which  in- 
crease the  efficiency  of  labour,  and  the  quantity  of 
wealth. 

A.  Rights  which  furnish  motives  to  industry. 
This  is  a  characteristic  of  all  the  rights  to  liberty, 
but  more  especially  the  rights  to  marriage  and 
property. 

B.  Rights  which  increase  the  abilities  of  labour- 
ers, especially  the  right  to  education,  and  the  free 
development  of  one's  abilities.  This  grows  out  of 
the  various  other  rights  to  liberty. 

II.  The  distribution  of  wealth.  Rights  which 
enable  labourers  to  procure  a  share  of  the  total  prod- 
uct in  excess  of  their  minimum  of  subsistence. 

A.  By  limiting  the  numbers  employed  in  a  given 
industry,  thereby  raising  wages.  (Freedom  of  con- 
tract and  combination.) 

B.  Rights  which  give  individuals  access  to  oppor- 
tunities for  the  production  and  acquisition  of  wealth. 
(Freedom  of  movement;  freedom  of  industry;  right 
to  use  the  free  gifts  of  nature ;  right  to  the  use  and 
enjoyment  of  public  property  and  services  on  an 
equality  with  others.) 

I.  Rights  viewed  from  the  standpoint  of  the  pro- 
duction of  wealth. 

Professor  Wagner  mentions  four  possible  motives  ^ 
whicli  lead  men  to  industry,  each  having  a  positive 
and  a  negative  side. 

1  Wagner,  Lehrbuch,  Bd.  I.,  s.  389. 


72  THE  DISTRIBUTION  OF   WEALTH  chap. 

1.  The  acquisition  of  wealth,  or  the  fear  of  want. 

2.  The  feeling  of  honour,  or  the  dread  of  shame. 

3.  The  fear  of  punishment,  or  the  hope  of  reward. 

4.  The  feeling  of  duty,  or  the  fear  of  remorse. 
To  which  may  be  added 

5.  Love  of  work,  and  dislike  of  idleness. 

With  the  slave,  the  third  motive  is  almost  the  only 
one  upon  which  reliance  is  placed.  Therefore  his 
work  must  be  poor  in  quality.  It  was  suited  only 
to  the  coarsest  kind  of  agriculture,  and  when  agri- 
culture gave  way  to  commerce  and  manufactures, 
slavery  had  outlived  its  usefulness.  It  gradually 
disappeared  in  all  European  countries,  after  passing 
through  the  stage  of  serfdom.  The  growth  of  wealth 
gave  rise  to  new  wants  for  new  and  better  goods,  and 
slave  labour  was  found  incapable  of  competition  with 
free  labour.  The  rise  of  the  free  cities  gave  protec- 
tion to  the  free  labourers  against  the  feudal  slave- 
holding  nobility,  and  the  capitalists  employing  this 
free  labour  grew  wealthy  and  powerful  at  the  expense 
of  the  landed  interest. 

Gradually  the  use  of  money  became  general  in  the 
country,  as  well  as  in  the  cities,  and  this  made  possi- 
ble a  system  of  wage-payments  instead  of  compulsory 
service.  This  enabled  the  land-owners  to  gain 
greatly,  for,  by  receiving  their  rents  in  money  in- 
stead of  services,  they  could  employ  free  workers 
when  and  where  they  needed  them,  and  be  relieved 
of  their  support  at  other  times.  The  production  of 
wealth  has  enormously  increased  under  a  regime  of 


II  THE  FACTORS  IN  DISTRIBUTION  73 

freedom;  because  higher  motives  in  the  labourers 
have  been  appealed  to.  The  right  to  enjo}^  the  fruits 
of  one's  own  labour,  in  one's  own  way,  is  the  most 
powerful  of  motives  for  industry  and  improvement, 
and  this  motive  is  guaranteed  by  freedom  in  all  its 
forms.  Especially  are  those  motives  which  lead  to 
provision  for  one's  own  family  powerful  industrial 
motives.  They  depend  upon  the  right  to  marriage, 
and  the  control  of  one's  family.  "The  marital  right 
of  a  husband,  as  against  the  world,  is  that  no  other 
man  shall,  by  force  or  persuasion,  dejDrive  him  of  his 
wife's  society,  still  less  be  criminally  intimate  with 
her."^  The  parental  right,  also,  which  extends  to 
the  custody  and  control  of  children  till  they  reach 
the  years  of  discretion,  is  a  powerful  stimulus  to  the 
production  and  accumulation  of  wealth. 

The  right  of  property  is  closely  connected  with  the 
right  of  marriage  and  family  life.  The  provisions 
of  law  for  the  ownership  of  goods  is  an  indispensa- 
ble motive  for  the  freeman  to  produce  goods. 

It  is  not  the  purpose  of  this  discussion  to  dwell 
upon  the  place  of  rights  in  the  production  of  goods. 
Our  special  interest  lies  in  their  influence  on  dis- 
tribution. But  we  may  notice  here,  again,  how 
economic  progress  clears  the  way  for  higher  ethical 
ideas.  Freedom  was  the  inevitable  outcome  of  ad- 
vancing industry,  and  being  thus  assured  of  a  sound, 
practical  basis,  it  became  ultimately  the  doctrine  of 
abstract  justice.  The  natural  equality  of  all  men 
1  Holland,  p.  150. 


74  THE  DISTRIBUTION  OF  WEALTH  chap. 

was  finally  asserted  in  essays,  constitutions,  pream- 
bles, and  declarations.  It  was  these  assertions  of  the 
dogmatists  and  humanitarians  which  were  needed  to 
drive  out  the  last  vestiges  of  slavery.  The  abstract 
right  to  freedom  as  a  matter  of  principle  did  not 
reach  its  triumph  until  the  abolition  of  negro  slavery 
by  England,  in  1836,  and  by  the  United  States  in 
1863  and  1867.  And  to-day  liberty  seems  to  us  to 
be  an  ultimate,  inalienable  right  of  man,  established 
in  his  very  nature,  so  fully  have  we  forgotten  the 
necessities  and  prejudices  of  centuries  of  ancestors. 

II.  Personal  rights,  and  the  distribution  of 
wealth. 

The  influence  of  the  right  to  life  upon  the  distri- 
bution of  wealth  has  already  been  examined.  We 
have  now  to  notice  the  influence  of  the  rights  to  lib- 
erty, employment,  and  marriage. 

The  return  which  the  labourer  gets  for  the  use  of 
his  personal  abilities  is,  like  all  commodities,  subject 
to  the  law  of  marginal  utility.  If  the  marginal  util- 
ity of  services  is  low,  wages  are  low ;  if  the  marginal 
utility  is  high,  wages  are  high.  The  marginal  utility 
depends  upon  the  quality  and  intensity  of  the  wants 
supplied  by  a  given  class  of  labourers,  and  upon  the 
number  of  the  labourers.  If  the  number  is  large 
compared  Avith  the  wants  supplied,  the  marginal 
utility  and  the  wages  will  be  low.  If  labourers, 
therefore,  can  limit  their  numbers  in  any  given 
industry,  with  reference  to  the  demand  for  their 
labour,  they  can   each  obtain   individually  a  larger 


II  THE  FACTORS  IN  DISTRIBUTION  75 

share  of  the  social  product  than  where  they  have  no 
control  over  their  numbers. 

The  right  to  limit  their  numbers  by  combinations 
and  labour  unions  is  one  of  their  most  important 
rights  of  freedom.  It  involves  restrictions  on  the 
admission  of  apprentices,  and  the  exclusion  of  non- 
union men  from  the  opportunities  of  the  trade.  It 
is  a  new  right,  having  been  granted  first  in  England, 
only  in  the  year  1824,  and  it  is  not  yet  fully  recog- 
nised in  other  countries.  It  is  an  extension  of  free 
exchange  and  contract.  Freedom  of  contract  is  the 
essential  right  of  freedom  in  industry.  It  is  alone 
the  legal  right  which  enables  the  labourer  to  refuse 
to  work  except  on  terms  which  suit  himself.  It 
therefore  gives  him  the  right  to  exact,  in  return  for 
the  use  of  his  personal  abilities,  a  surplus  of  the 
social  product  above  his  minimum  of  subsistence. 
But,  for  this  purpose,  it  applies  only  to  organised 
and  scarcity  labourers,  i.e.  to  labourers  who  are 
able,  by  limitations  on  their  numbers,  to  keep  their 
marginal  utility  above  the  minimum.  The  skilled, 
the  intelligent,  the  educated,  the  gifted,  labourers, 
those  in  whom  intellectual  and  moral  qualities  pre- 
dominate, are  benefited  by  the  freedom  of  contract. 
But  for  the  unskilled,  the  unorganised,  the  redun- 
dant labourers,  those  whose  marginal  utilit}*  is  low, 
freedom  of  contract  offers  no  help.  Their  condition 
is  worse  than  that  of  slaves,  for  they  may  not  even 
secure  a  minimum  of  subsistence,  unless  they  come 
upon  the  poor-relief.     Freedom  of  contract  is  two- 


76  THE  DISTRIBUTION  OF  WEALTH  chap. 

sided.  It  is  freedom  for  the  employer  as  well  as  for 
the  labourer;  and  if  the  labourer  is  unable  by  it,  or 
otherwise,  to  limit  his  numbers  and  maintain  a  high 
marginal  utility,  he  cannot  compel  the  employer  to 
pay  to  him  more  than  this  marginal  utility. 

The  right  of  combination,  therefore,  in  its  influ- 
ence on  the  distribution  of  wealth,  has  a  contradic- 
tory effect.  It  enables  organised  labourers  to  limit 
their  numbers  arbitrarily,  and  thus  raises  their  wages ; 
but  it  thereby  depresses  the  marginal  utility  of  the 
unorganised. 

There  are  two  ways  for  labourers  to  keep  up  their 
wages  through  keeping  up  the  marginal  utility  of 
their  labour.  The  first  is  that  just  discussed, —  the 
limitation  of  the  numbers  permitted  to  enter  into  that 
particular  industry;  the  second  consists  in  finding 
new  opportunities  where  the  marginal  wants  for  their 
labour  are  more  intense.  Both  methods  depend,  in 
their  ultimate  analysis,  upon  the  relative  scarcity  of 
labourers  compared  with  the  demand;  but  the  first 
achieves  the  result  by  limiting  the  supply,  the  second 
by  extending  the  demand.  The  possibility  of  em- 
ploying the  second  method,  like  that  of  employing 
the  first,  depends  upon  certain  personal  legal  rights. 
These  are  divisions  of  the  great  right  of  freedom, 
and  involve  its  necessary  corollary,  equality.  They 
are, — 

1.  Freedom  of  movement. 

2.  Freedom  of  industry. 

3.  Right  to  use  the  free  gifts  of  nature. 


II  THE  FACTORS  IN  DISTRIBUTION  77 

4.  Right  to  the  use  and  enjoyment  of  public  prop- 
erty and  services  —  (highways,  post-office,  railways, 
law  courts  and  officers  for  administering  justice  and 
enforcing  rights). 

1.  Freedom  of  movement.  —  This  is  a  right  which 
has  not  been  fully  granted  even  to  the  freeman  until 
recent  years.  It  includes  not  only  the  right  to  move 
about  within  one's  own  country,  but  also  that  of  emi- 
gration and  immigration.  The  value  of  this  right 
to  the  labourer  is  unquestioned.  It  protects  him  in 
his  efforts  to  better  his  condition,  and  raise  his  wages, 
by  abandoning  a  country  where  labour  of  his  partic- 
ular kind  is  overabundant  relatively  to  the  demand, 
and  where  the  marginal  utility,  therefore,  is  low, 
and  by  going  to  another  country  where  labour  is 
relatively  scarce,  and  the  marginal  utility  high. 
Where  laws  have  been  passed  restricting  this  free- 
dom of  movement,  the  underlying  object  of  the  ruling 
classes  has  been  to  maintain  an  oversupply  of  labour 
and  consequent  low  wages.  This  was  true  of  the 
English  laws  of  settlement  and  apprenticeship  which 
depressed  agricultural  wages,  and  is  now  true  of  the 
restrictions  on  negro  emigration  from  our  Southern 
States. 

2.  Freedom  of  industry  is  closely  connected  with 
freedom  of  movement,  and  has  allied  effects  on 
wages.  By  freedom  of  industry  is  meant,  not  the 
right  of  the  labourer  to  abandon  one  employment 
and  seek  another,  for  that  right  is  fully  compre- 
hended in  the  right  to  free  movement  and  contract; 


78  THE  DISTRIBUTION  OF  WEALTH  chap. 

but  it  is  his  right  to  establish  a  new  enterprise,  and  be- 
come an  independent  producer  and  employer,  so  long 
as  he  does  not  interfere  with  like  rights  of  others. 
In  this  way  an  overcrowded  industry  is  relieved,  and 
the  labourer  finds  a  higher  marginal  utility  for  his 
labour.  This  he  may  do  in  two  ways:  either  by 
entering  upon  new  land  where  he  can  supply  his  own 
wants  directly,  and  in  greater  abundance  than  here- 
tofore ;  or  by  contriving  to  satisfy  the  wants  of  soci- 
ety, either  by  discovering  and  cultivating  a  new 
want,  or  by  satisfying  more  fully  some  old  want. 

3.  The  right  to  use  the  free  gifts  of  nature  is  a 
right  that  sometimes  must  be  guaranteed  by  the 
state,  as  when  nuisances  which  pollute  the  air  or  the 
water  are  prohibited,  or  interferences  by  adjoining 
landlords  with  the  supply  of  light  are  prevented. 
This  right  does  not  extend,  except  partially,  to  the 
use  of  the  limited  gifts  of  nature,  as  land.  The 
consideration  of  this  subject,  however,  comes  under 
another  head,  the  I'ight  to  employment. 

4.  The  right  to  make  use  of  all  the  advantages 
open  to  the  community  in  general  is  indispensable 
for  the  labourer  in  taking  advantage  of  his  other 
rights.  The  state  provides  highways  and  waterways, 
and  guarantees  to  all  freemen  their  free  and  gratui- 
tous use.  It  provides  public  services  for  all  citizens, 
and  guarantees  the  equal  right  of  all  to  the  free  use 
of  these,  upon  the  payment  of  established  fees  and 
charges.  The  means  of  communication,  including 
post-office,  telegraph,  railways,  are  essentially  public 


II  THE  FACTORS  IN  DISTRIBUTION  79 

services,  though  in  some  countries  government  fails 
to  perform  its  duty  to  all  citizens  in  guaranteeing 
the  equal  right  of  all  to  use  them.  The  administra- 
tion of  justice,  and  the  enforcement  of  rights,  are 
services  which  government  performs  freely  for  all 
individuals. 

The  uses  of  public  property  and  public  services, 
when  properly  administered,  have  this  significance 
for  the  labourer,  that  they  open  up  to  him  new 
and  wider  opportunities  where  the  marginal  utility 
of  his  labour  is  high,  and  thus  enable  him  to  aban- 
don old  and  narrow  fields  of  labour  where  wages  are 
low. 

Rigid  to  Employment. — We  have  seen  that  the 
rights  to  life  and  liberty  have  been  the  result  of  an 
historical  development,  due  to  continually  increasing 
economic  resources,  and  higher  ethical  standards. 
The  right  to  liberty  is  now  looked  upon  as  belonging 
to  man  as  a  man.  It  indicates  that  we  have  a  much 
higher  idea  of  the  dignity  of  man  than  ever  before. 
But  the  acquisition  of  liberty  has  been  made  at  heavy 
expense  in  other  directions.  Though  the  slave  was 
compelled  to  work,  he  never  suffered  from  that  terri- 
ble evil  of  the  modern  labourer,  lack  of  work.  With 
the  coming  of  freedom,  the  labourer  was  divorced 
from  his  means  of  livelihood,  and  now  that  all  availa- 
ble land  has  become  private  propert}^  and  all  capital 
is  private  property,  the  propertyless  man  is  a  depend- 
ent when  work  is  plenty,  and  a  vagabond  when 
work  is  slack.     Of  what  use  to  him  are  his  centuries 


80  THE  DISTRIBUTION  OF  WEALTH  chap. 

of  struggle  for  the  riglit  to  life  and  the  right  to  lib- 
erty, if  he  is  denied  the  right  to  produce  for  himself 
the  food,  and  clothing,  and  shelter  that  preserve  life, 
and  that  make  liberty  worth  having  ?  The  rights  to 
life  and  liberty  are  practically  denied  to  labourers  in 
our  day,  by  virtue  of  the  denial  of  the  right  to  em- 
ployment. There  is,  therefore,  pressing  upon  us,  the 
claim  for  recognition  of  this  new  and  higher  right, 
belonging  to  man  as  a  man,  by  virtue  of  the  very 
dignity  of  the  manhood  that  is  in  him.  The  claims 
of  justice  rebel  at  the  dictates  of  law  which  have 
reduced  the  earth  and  all  the  opportunities  for  liveli- 
hood to  the  private  possession  of  one  third  the  race, 
and  thus  compel  the  other  thirds  to  be  either  wage- 
slaves  or  paupers.  The  right  to  work,  for  every  man 
that  is  willing,  is  the  next  great  human  right  to  be 
defined  and  enforced  by  the  law. 

The  right  to  employment  is  simply  a  new  applica- 
tion, under  modern  conditions,  of  the  old  right  to 
freedom  of  industry.  Free  industry  meant  essentially 
the  right  to  free  access  to  nature  for  the  production 
and  acquisition  of  wealth.  But  it  applied  only  to 
organisers,  promoters,  entrepreneurs,  employers.  So 
far  as  it  applied  to  labourers,  it  was  only  the  right 
to  quit  the  ranks  of  wage-receivers,  and  to  enter  the 
ranks  of  profit-receivers.  But  such  a  right  could 
have  practical  value  only  in  a  country  and  at  a  time 
when  industry  was  unorganised,  and  there  were 
abundant  new  opportunities  for  investment,  as  in  the 
United  States   up  to   the  last  quarter  of  the  nine- 


II  THE  FACTORS  IN  DISTRIBUTION  81 

teenth  century.  We  had  an  immense  area  of  vacant 
public  lands,  and  these  were  open  to  the  people  on 
generous  terms,  inviting  every  man  to  independence. 
Other  industries  were  conducted  on  a  small  scale, 
and  an  enterprising  man  could  easily  crowd  to  the 
front  and  become  an  independent  producer.  But 
to-day  freedom  of  industry  is  no  boon  except  to  the 
wealthy  capitalist.  All  industries  except  agricult- 
ure and  retail  merchandising  have  become  monopo- 
lised, and  these  are  rapidly  on  the  road  to  monopoly. 
It  requires  immense  capital  nowadaj's  to  become  an 
entrepreneur.  The  great  mass  of  the  people  must 
remain  wage-  and  salary-receivers.  Consequently, 
the  only  way  in  which  these  people  can  get  access 
to  nature  for  production  is  through  the  recognition 
of  the  right  to  employment. 

This  is  twofold:  1.  The  right  to  security  in  the 
tenure  of  employment  against  arbitrary  discharge, 
as  long  as  one  proves  efficient  and  honest.  2.  The 
right  of  the  unemployed  to  have  work  furnished  by 
government.  Each  of  these  will  be  briefly  examined 
later,  but  let  us  notice  first  the  signs  of  the  times 
which  indicate  the  beginnings  of  this  recognition 
both  in  public  and  private  industries. 

The  movement  for  civil  service  reform  in  govern- 
ment enterprises  is  a  demand  for  recognition  of 
the  right  to  employment.  Most  civilised  countries 
have  adopted  this  reform.  The  national  government 
of  the  United  States  has  adopted  it  partially  in  the 
public  service,  all  cities  have  done  so  in  their  fire 


82  THE  DISTRIBUTION  OF  WEAITH  chap. 

departments,  and  many  in  other  departments.  In 
our  country,  the  arguments  in  its  favour  are  usually 
based  on  the  improvement  of  the  service,  and  the 
purification  of  politics,  rather  than  on  the  right  to 
employment.  But  the  two  go  together.  The  right 
to  tenure  of  office  in  public  employment  could  not 
be  guaranteed  to  labourers,  if  at  the  same  time  it 
should  not  prove  a  benefit  to  the  public.  The  same 
is  true  of  private  employment.  The  guaranty  of  this 
right  would  be  worth  millions  of  dollars  to  the  coun- 
tr}^  every  year,  for  it  would  do  away  with  the  tre- 
mendous losses  on  account  of  strikes,  lockouts,  and 
chronic  hostility  between  employers  and  employes. 

But  how  is  the  right  to  be  enforced?  Its  enforce- 
ment in  the  public  service  is  by  means  of  public 
judicial  tribunals  having  power  to  try  every  case  on 
its  merits.  And  in  private  service  we  may  learn 
that  it  can  be  enforced  in  the  same  way,  if  we  com- 
pare the  history  of  the  rights  to  life  and  liberty.  The 
right  to  life,  we  know,  was  not  authoritatively 
enforced  until  courts  of  justice  were  established  by 
the  sovereign  to  apprehend,  examine,  and  punish 
violators;  that  is,  until  government  and  law  had  ad- 
vanced so  far  as  to  provide  remedial  rights  and  forms 
of  procedure.  And  so  with  the  right  to  employment. 
The  new  courts  that  shall  enforce  the  right  to  employ- 
ment are  courts  of  arbitration,  created  by  govern- 
ment, and  empowered  to  compel  employers  to  submit 
to  investigation  and  to  suffer  punishment  for  violat- 
ing the  right  of  employes  to  work.     No  man  is  to  be 


II  THE   FACTORS  IN  DISTRIBUTION  83 

discharged  for  any  cause  except  inefficiency  and  dis- 
honesty. Wages,  hours  of  labour,  conditions  of 
work,  are  to  be  adjudicated  by  the  courts.  This  is 
not  the  place  to  enter  upon  the  details  of  these  laws. 
It  is  sufficient  to  know  that  they  are  already  in  oper- 
ation in  the  mining  districts  of  Belgium,  and  are 
being  proposed  in  other  countries.  If  they  were 
adopted  everywhere  and  applied  to  all  industries, 
there  is  no  doubt  that,  so  long  as  industry  is  pros- 
perous, the  labourer  would  be  as  independent  in  his 
right  to  employment  as  he  is  in  his  right  to  life. 

But  this  would  solve  only  half  the  problem  of  lack 
of  work,  and  that  the  easier  half.  The  most  difficult 
part  for  solution  is  that  involuntary  idle7iess  which 
attacks  both  employer  and  employ^,  and  closes  fac- 
tories as  a  result  of  industrial  crises  and  depressions. 
Besides  this,  there  is  the  mass  of  employes  who  are 
being  continually  displaced  by  new  machines  and 
new  methods  of  doing  business  (trusts).  One  can- 
not be  so  sure  in  his  application  of  a  remedy  for 
these  two  evils,  as  for  the  evils  of  arbitrary  dis- 
charge.    But  a  few  suggestions  can  be  offered. 

1.  The  right  to  employment,  like  the  rights  to 
life  and  liberty,  depends  upon  economic  progress, 
and  an  increased  production  of  wealth.  This  is 
exactly  what  is  occurring  to-day  in  the  growth  of 
monopolies,  which  are  the  greatest  economic  inven- 
tions the  world  has  ever  known. 

2.  The  industrial  depression  is  caused  by  over- 
production.    Hence,  when  industries  are  organised 


84  THE  DISTRIBUTION   OF  WEALTH  chap. 

on  the  basis  of  the  trust,  in  so  far  there  will 
be  no  overproduction,  and  therefore  no  more 
crises  and  depressions.  Work  will  be  constant  and 
regular  for  those  who  work  at  all,  though  there 
might  still  be  large  numbers  of  the  perennially 
unemployed. 

3.  The  displacement  of  labourers  by  machinery 
and  by  trusts  can  be  remedied  by  government  through 
emplojnnent  bureaus  and  public  works. 

4.  A  system  of  taxation  which  would  compel 
owners  of  unimproved  lands  and  natural  resources 
held  for  speculation,  to  open  them  up  to  labourers, 
either  by  themselves  making  the  lands  productive,  or 
by  selling  or  leasing  to  others  who  would  do  so.^ 

The  right  to  employment  when  enforced  would  have 
the  effect  of  guaranteeing  to  every  worker,  even  the 
lowest,  a  share  of  the  total  income  in  excess  of  his 
minimum  of  subsistence.  It  would  give  steady  work 
through  the  year,  which  would  increase  the  wages  of 
the  lowest  labourers  by  30%  to  50%.  And  by  over- 
coming the  chronic  excess  of  labourers  beyond  the 
opportunities    for   employment,   it  would   raise   the 

1  The  writer  is  informed,  that  through  the  recent  partial 
introduction  of  the  "  Single  Tax"  in  New  Zealand  the  great  Land 
and  Mortgage  Company  of  that  colony,  being  compelled  to  put  its 
immense  speculative  holdings  to  productive  use,  has  been  unable 
to  find  labourers  in  the  colonies,  and  has  just  sent  to  Ireland  for 
six  ship-loads  of  immigrants. 

To  say  that  the  suggestions  here  offered  are  wholly  adequate  or 
practicable,  would  at  present  be  mainly  dogmatism.  There  is 
needed  yet  a  multitude  of  experiments  and  years  of  patient, 
scientific  thought. 


II  THE  FACTORS  IN  DISTRIBUTION  85 

marginal   utility   of    the    marginal    labourers,    thus 
raising  the  wages  of  all. 

5.  Right  to  Marriage.  —  This  right  has  a  double 
significance. 

(1)  For  the  individuals  contracting  it  serves  as 
the  most  powerful  of  all  motives,  to  industry  and 
increased  production.  In  so  far  it  assists  in  creating 
a  large  income  to  be  divided  among  producers. 

(2)  For  the  social  class  to  which  the  parties  be- 
long. Ancient  restrictions  have  been  removed  except 
against  marriage  of  near  relatives,  and  in  the  case 
of  sanitary  regulations.  On  the  whole,  individual 
freedom  is  far  greater  than  social  restriction.  While 
statistical  investigations  show  that  a  large  and  grow- 
ing population  can  produce  greater  amounts  of  wealth 
per  capita  than  can  small  and  stationary  peoples,  it 
is  also  shown  that  the  most  rapidly  increasing  factor 
is  at  a  disadvantage  in  the  sharing  of  this  product. 
Competition  forces  down  the  per  capita  wages  of 
that  class  of  labourers  which  increases  in  numbers 
most  rapidly,  by  lowering  the  marginal  utility  of  the 
last  labourers.  These  are  the  ones  that  are  dis- 
charged by  thousands  when  panics  and  depressions 
appear.  The  unrestricted  right  to  marriage  permits 
the  poorer  and  uneducated  classes  to  make  early 
marriages  without  the  necessary  ripeness  of  mind, 
character,  or  body,  and  without  adequate  economic 
resources.  It  is,  therefore,  indirectly,  one  of  the 
most  powerful  causes  for  the  material  and  mental 
poverty  of   the  lower  classes.      Too  early  marriages, 


86  THE  DISTRIBUTION  OF  WEALTH  chap. 

too  large  a  number  of  children  for  adequate  provi- 
sion, make  the  new  generations  physically  and  men- 
tally impotent.  This  has  a  cumulative  effect,  and 
succeeding  generations  are  weaker  still. 

Section  VII.  —  Rights  of  Pro'perty. 

It  has  been  stated  that  the  right  of  property  is 
composed  of  four  elements ;  the  person  entitled,  the 
object,  the  act  or  forbearance,  and  the  person  obliged. 
For  the  purposes  of  the  present  study  we  need  to 
examine  only  the  first  two  of  these  elements,  remem- 
bering that  the  latter  two  involve  a  technical  legal 
discussion  beyond  the  immediate  requirements  of 
economic  analysis. 

1.  The  Person  entitled.  —  The  subject  of  a  right  is 
a  person,  or  else  it  is  looked  upon  by  the  law  as  a 
person.  The  most  radical  distinction  in  law  is  that 
between  public  and  private  persons.  "A  public  per- 
son ...  is  the  state  or  the  sovereign  part  of  it,  or  a 
body  or  individual  holding  delegated  authority  under 
it."  "A  private  person  ...  is  an  individual,  or  col- 
lection of  individuals  however  large,  Avho,  or  each 
one  of  whom,  is,  of  course,  a  unit  of  the  state,  but 
in  no  sense  represents  it  even  for  a  special  purpose."  ^ 

By  the  operation  of  the  law,  there  is  created  a 
class  of  persons  embodying,  in  the  eyes  of  the  law, 
the  characteristics  of  individual  persons,  but  also 
possessed  of  certain  sovereign  attributes  of  the  state 
itself.     These  are  corporations,  and  there  results  the 

1  Holland,  p.  109. 


II  THE  FACTORS  IN  DISTRIBUTION  87 

division  of  private  persons  into  two  classes,  natural 
and  artificial.  "The  characteristics  of  an  artificial 
person  differ  from  those  of  a  group  of  natural  per- 
sons no  less  than  from  those  of  a  single  natural 
person.  On  the  one  hand,  it  is  not  merely  the  sum 
total  of  its  component  members,  but  something 
superadded  to  them.  It  may  remain,  although  they, 
one  and  all  are  changed.  The  property  which  it 
may  hold  does  not  belong  to  the  members  either  in- 
dividually or  collectively.  Its  claims  and  liabilities 
are  its  own.  Its  agents,  though  appointed  by  a 
majority  of  its  members,  do  not  represent  them.  In 
all  these  respects,  true  artificial  persons  are  distin- 
guishable from  clubs  and  unincorporated  partner- 
ships, however  large. 

"  On  the  other  hand,  an  artificial  necessarily  differs 
from  a  natural  person.  'A  corporation  aggregate  of 
many  is  invisible,  immortal,  and  rests  only  in  in- 
tendment and  consideration  of  law.  It  has  no  soul, 
neither  is  it  subject  to  the  imbecilities  of  the  body. ' 
Its  will  is  that  of  the  majority  of  its  members,  and  can 
be  expressed  only  by  means  of  an  agent.  There  are 
many  wrongful  acts  of  which  it  is  obviously  incapa- 
ble, and  its  capacity  for  being  the  subject  of  rights 

—  'rechtsfahigkeit'  —  and  for  performing  legal  acts 

—  'handlungslahigkeit '  —  is  strictly  limited  by  the 
purposes  by  which  its  existence  is  recognised."  ^ 

It  is  plain,   therefore,    that    to    corporations   the 
state  delegates  a  portion  of  its  sovereignty,  but  this 
1  Holland,  290. 


88  THE   DISTRIBUTION   OF  WEALTH  chap. 

exists  in  different  degrees  in  different  corporations. 
(1)  To  all  corporations  is  granted  so  much  of  sov- 
ereignty as  is  necessary  to  act  with  unity.  This 
involves  compulsion  of  the  minority  of  the  members 
by  the  majority.  Although  membership  in  a  corpo- 
ration is  looked  upon  as  a  contract  between  the  sev- 
eral stockholders,  it  is  more  than  a  contract ;  it  is  an 
agreement  to  submit  to  whatever  policy,  within  the 
law,  a  majority  of  the  stockholders  may  dictate. 
This  indefinite  power  given  to  the  majority,  and 
enforced  by  the  state,  is  less  in  extent,  yet  similar 
in  effect,  to  that  exercised  by  the  state  itself  over 
its  own  members.  (2)  Private  corporations  may  be 
entrusted,  in  addition  to  their  corj)orate  franchises, 
also  with  sovereign  power  over  the  community  at 
large,  as  when  railway  corporations  exercise  the  right 
of  eminent  domain  and  expropriation  of  property- 
holders,  and  the  right  to  charge  tolls  for  carrying 
freight  and  passengers.  (3)  Political  corporations, 
such  as  municipal  corporations,  possess  very  many 
sovereign  attributes,  especially  those  of  eminent 
domain  and  taxation.  These  are  properly  not  cor- 
porations, but  branches,  departments,  or  divisions 
of  government,  instituted  for  convenience  in  the 
administration  of  strictly  public  affairs.  Therefore 
the  property  rights  enjoyed  by  them,  as  well  as  those 
enjoyed  by  the  state  itself,  are  to  be  looked  upon  as 
public  property. 

The  state,  with  its  administrative  divisions,  being 
looked  upon  as  a  person,  may  be  the  subject  of  rights 


II  THE  FACTORS  IN  DISTRIBUTION  89 

and  duties  similar  to  those  of  private  persons. 
"Besides  its  rights  and  duties  as  the  guardian  of 
order,  in  which  respect  little  analogy  can  be  re- 
marked to  anything  in  private  law,  the  state  as  a 
great  juristic  person  enjoys  many  guasi-rights  against 
individuals,  as  well  strangers  as  subjects,  and  is 
liable  to  many  ^'wasi'-duties  in  their  favour.  These 
rights  and  duties  closely  resemble  those  which  pri- 
vate law  recognises  as  subsisting  between  one  indi- 
vidual and  another.  The  state,  irrespectively  of  the 
so-called  "eminent  domain"  which  it  enjoys  over 
all  the  lands  forming  its  territory,  is  usually  a  great 
landed  proprietor;  and  in  respect  of  its  land  is 
entitled  to  servitudes  over  the  estates  of  individuals, 
and  subject  to  servitudes  for  the  benefit  of  such 
estates.  It  owns  buildings  of  all  sorts,  from  the 
palace  to  the  police  station,  and  a  large  amount  of 
personal  property,  from  pictures  by  Titian  and  Tin- 
toretto to  cloth  for  making  the  prison  dress  of  con- 
victs. It  carries  on  gigantic  manufacturing  under- 
takings, lends  and  borrows  money,  issues  promissory 
notes,  and  generally  enters  into  all  kinds  of  con- 
tracts. It  necessarily  acts  by  means  of  agents,  who 
may  exceed  their  powers  or  act  fraudulently.  Its 
servants  may  wilfully  or  negligently  cause  damage 
to  individuals.  It  may  become  a  mortgagee,  and 
in  many  cases  allows  itself  a  tacit  hypothec  by  way 
of  security  for  what  is  owed  to  it.  It  is  capable  of 
taking  under  a  will,  and  succeeds  ah  intestato  to 
all  those  who  die  without  leaving  heirs.    Its  rights 


90  THE  DISTRIBUTION  OF  WEALTH  chap. 

and  liabilities  under  many  of  these  heads  are  dif- 
ferent from  those  of  individuals,  or  even  of  private 
artificial  persons,  especially  with  reference  to  liabil- 
ity for  injury  done  its  servants  and  as  to  the  barring 
of  its  rights  by  prescription,  though  here  the  modern 
tendency  is  to  modify  the  strictness  of  the  old  rule, 
that  "nullum  temj^us  occurrit  regi."^ 

2.  The  object  over  which  the  right  of  property 
exists  must  be  capable  of  physical  appropriation,  else 
like  the  air  and  sunlight  it  cannot  become  property. 
It  must  be  valuable  —  i.e.  useful  and  limited  in 
quantity  —  else  there  will  be  no  inducement  on  the 
part  of  any  one  to  appropriate  it  as  his  own.  And, 
most  important  of  all,  it  must  be  recognised  by  the 
law  of  the  land,  by  the  courts  of  justice  and  even  the 
military  power  of  the  state  as  an  object  of  property. 
This  is  a  fundamental  condition. ^ 

I  have  said  that  the  object  must  be  capable  of 
physical  appropriation;  yet  by  a  legal  fiction  "the 
idea  of  ownership  has  been  so  far  extended  as  to 
make  it  apj)licable  to  certain  closely  coherent  masses 
of  rights ;  which  are  thus  treated  for  certain  pur- 
poses as  if  they  were  tangible  property.  "^  The  law, 
therefore,  classifies  things  as  material  and  immate- 
rial, res  corporales  and  res  incorporales.  But  it  is  an 
interesting  fact,  as  indicating  the  basis  of  this  fiction, 
that  the  common  law  officers  will  not  levy  upon  such 
an  intangible  thing  as  the  "good-will  "  of  a  business, 

1  Holland,  p.  330.  ^  gee  Samter,  Eigentum,  p.  3. 

8  Holland,  p.  178. 


II  THE  FACTORS  IN  DISTRIBUTION  91 

while  tliey  will  execute  a  judgment  upon  patent 
rights,  mortgages,  and  promissory  notes.  This  is 
because  the  latter  rights  have  legal  documentary 
representatives  which  are  tangible,  though  the  rights 
themselves  are  intangible.  But  the  good-will  of  a 
business  is  both  intangible  and  unrepresented  by 
legal  paper,  and  therefore  cannot  be  reached  by  the 
officers.  Yet  the  "good-will  "  may  be  transferred  by 
means  of  a  contract,  stipulating  that  the  original 
possessor  will  abstain  from  following  the  same  pur- 
suit whose  good-will  he  has  sold,  and  the  contract 
can,  of  course,  be  enforced  by  law. 

The  question  of  the  proper  place  for  these  immate- 
rial rights  is  one  of  the  most  important  in  economic 
analysis.  Economists  generally  classify  them  as  a 
species  of  capital,  but  a  careful  consideration  of  the 
part  they  play  in  economics  will  show  that  they  are 
radically  different  from  capital.  First,  however,  we 
need  to  examine  the  economic  justification  of  the 
jurists'  classification  of  res  corporales  and  res  incorpo- 
rales.  To  do  this,  we  must  begin  with  an  analysis 
of  the  ultimate  nature  of  property.  Austin  defines 
property  as  "  a  right  over  a  determinate  thing,  indefi- 
nite in  point  of  user,  unrestricted  in  point  of  dispo- 
sition, and  unlimited  in  point  of  duration " ;  and 
Donisthorpe  puts  it  as  follows :  "  Property  is  all  those 
undefined  uses  over  a  thing  Avhich  remain  over  after 
the  definite  and  specific  uses  of  others  have  been 
deducted."  1  According  to  this  definition,  c?g^m'fe 
1  Individualism,  p.  98. 


92  THE  DISTRIBUTION  OF  WEALTH  chap. 

rights  of  property  are  not  strictly  proprietary.  They 
are  simply  interests  or  claims  in  the  valuable  object, 
and  the  proprietary  right  is  the  indefinite  residuum 
which  remains  after  these  have  been  deducted. 

To  the  popular  apprehension,  this  rigid  definition 
of  property  seems  somewhat  arbitrary.  At  least,  from 
the  standpoint  of  the  economist,  it  is  better  to  recog- 
nise all  of  the  elements  of  legal  control  over  valuable 
objects  as  property  rights ;  but  to  designate  certain 
of  these  rights  as  definite,  and  the  residuum  as 
indefinite. 

Property  is,  therefore,  not  a  single  absolute  right, 
but  a  bundle  of  rights.  The  different  rights  which 
compose  it  may  be  distributed  among  individuals 
and  society  —  some  are  public  and  some  private,  some 
definite,  and  there  is  one  that  is  indefinite.  The 
terms  which  will  best  indicate  this  distinction  are 
partial  and  full  rights  of  property.  Partial  rights 
are  definite.  Full  rights  are  the  indefinite  residuum. 
The  total  right  of  property  over  a  valuable  object 
may  be  represented  by  a  line  of  indefinite  length, 
from  which  are  marked  off  definite  lengths  for  the 
partial  rights,  as  indicated  in  Diagram  II. 

It  is  to  be  noted,  in  agreement  with  Austin,  that 
the  total  right  of  property  extends  indefinitely  not 
only  in  the  direction  of  the  use  and  disposition  of  the 
object,  but  also  in  the  duration  of  the  control.  A 
partial  right  of  property,  therefore,  may  be  either  a 
right  which  limits  its  use  and  disposition  by  the  full 
owner,  or  one  which  merely  limits  the  time  over 
which  his  full  control  extends. 


THE  FACTORS  IN  DISTRIBUTION 


93 


1.  The  first  definite 
right  to  be  deducted  from 
the  total  riglit  of  propert}'- 
is  the  public  right  of  emi- 
nent domain.  This  is  the 
definite  right  which  be- 
longs to  the  state  in  its 
organised  capacity  of  pur- 
chasing any  property  what- 
soever at  its  market  value, 
whenever  public  safety, 
interest,  or  expediency  re- 
quires. It  is  merely  a 
definite  restriction  upon 
the  unlimited  control 
which  belongs  to  the  in- 
dividual. 

2.  Another  right  be- 
longing to  the  public  is 
the  right  of  way.  Every 
landowner  owns  to  the 
middle  of  the  road  or 
street  adjoining  his  land. 
If  the  road  were  closed 
up,  he  could  extend  his 
fences,  and  resume  in  pos- 
session that  which  had 
always  been  his,  though 
subject  to  a  definite  pub- 
lic right  of  use. 


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94  THE  DISTRIBUTION  OF  WEALTH  chap. 

3.  Strangely  enough,  the  right  of  taxation  is  not 
mentioned  by  able  jurists  as  one  of  the  definite  pub- 
lic rights  which  must  be  deducted  before  the  indefi- 
nite residuum  of  private  property  is  determined. 
Taxes  are  conceived  by  them  as  payments  made  by 
owners  for  the  protection  of  their  private  property. 
This  false  view  results  from  the  lack  of  histori- 
cal investigation,  but  without  the  latter  a  complete 
juridical  analysis  will  show  its  inadequacy.  The 
data  resulting  from  such  an  investigation  reveal  the 
principle  that  government,  i.e.  the  people  in  their 
organised  capacity,  is  part  owner  of  every  piece  of 
land  within  its  jurisdiction.  Take,  for  example,  a 
tract  of  land  whose  market  value  is,  say,  82000. 
If  taxes  are  fifteen  mills  on  the  dollar,  this  property 
will  be  taxed  to  the  amount  of  $30  per  year.  The 
government  is  joint  owner  in  that  land  to  the  extent 
of  an  annual  income  of  i30,  and  the  individual  is 
owner  of  the  residuum.  What  is  the  value  of  the 
state's  portion?  Land  being  an  object  not  of  imme- 
diate utility,  its  value  is  determined  solely  by  its 
productive  capacity.  It  is  the  capitalisation  at  the 
current  rate  of  interest  of  the  annual  production  of 
the  land.  To  determine  the  value  of  the  state's  por- 
tion, the  income  of  the  state  must  be  capitalised  at  the 
current  rate  of  interest.  If  this  is  6%,  the  state's 
portion  is  worth  $500,  and  the  total  value  of  the 
property  is  $2500.  It  is  plain  that  the  individual, 
when  he  bought  the  land,  did  not  buy  the  whole  of 
it.     He   paid   $2000   for   property   which    is    worth 


II  THE  FACTORS  IN  DISTRIBUTION  95 

$2500.  If  the  government  had  waived  its  right 
to  the  annual  revenue  of  $30,  this  would  have 
fallen  to  the  individual  proprietor,  and  he  would 
have  paid,  not  -12000,  but  $2500  for  his  property. 
In  like  manner,  the  value  of  the  property  to  the 
individual  rises  or  falls  inversely  according  to  the 
annual  income  which  the  state  exacts.  Should  it  be 
in  the  case  supposed,  $60  instead  of  $30,  the  ])rivate 
element  would  be  worth  $1500  instead  of  $2000,  and 
the  state's  share  would  have  been  $1000  instead  of 
$500.  The  public,  therefore,  has  a  definite  right 
of  taxation  in  every  piece  of  land,  changing,  no 
doubt,  from  year  to  year,  according  to  the  needs  of 
the  government,  but  always  definite  and  limited. 

4.  The  fourth  definite  public  right  is  a  negative 
one,  namely,  that  the  owner  must  not  use  his  indefi- 
nite residual  rights  in  such  a  way  as  to  injure  others. 
His  property  must  not  become  a  public  nuisance. 

5.  Closely  connected  with  this  is  the  right  belong- 
ing to  the  state  that  private  property  must  not  be 
used  in  a  way  contrary  to  public  policy.  Thus  the 
courts  will  refuse  to  enforce  a  contract  which  exists 
or  may  exist  for  the  restriction  of  production. 

6.  The  public  has  also  a  number  of  definite  rights 
in  the  property  of  individuals  which  emerge  only  on 
the  occasion  of  certain  unlawful  acts  or  other  facts 
on  the  part  of  the  property-owner.  These  are  fines, 
forfeitures,  and  escheats. 

The  partial  rights  which  have  been  mentioned  thus 
far  are  attributes  of  the  ultimate  sovereignty  which 


96  THE   DISTRIBUTION  OF  WEALTH  chap. 

the  state  has  over  all  property  in  its  jurisdiction. 
They  are  imposed  upon  property  simply  by  virtue 
of  the  force  which  government  exercises,  without 
regard  to  the  freedom  of  the  individual  owner  in  the 
matter.  In  a  constitutional  government,  certain 
principles  and  machinery  of  law  are  provided  to 
prevent  the  arbitrary  employment  of  these  rights, 
and  to  do  justice  to  the  individual.  But  in  the  end 
the  individual  is  compelled  to  submit  to  them,  and  in 
so  far  he  is  not  the  absolute  owner  of  his  property.^ 

But  there  are  other  partial  rights  which  the  owner 
may  grant  away,  and  which  do  not  pass  without  the 
condition  that  the  owner  has  been  free  in  his  will  to 
dispose  of  them.  These  partial  rights  grow  out  of 
the  owner's  right  to  freedom  of  contract.  They  are 
especially  servitudes  and  easements,  pledges  and 
mortgages,  trusts  and  contracts.  While  the  law  on 
this  subject  is  so  complicated  as  to  prevent  a  thor- 
ough discussion  in  this  essay,  their  main  characteris- 
tics may  be  briefly  mentioned,  in  order  to  point  out 
the  partial  nature  of  the  rights  which  they  guarantee. 

A  servitude  is  a  specific  right  of  using  land  for 
certain  definite  and  limited  purposes,  such  as  riding 
or  driving  cattle  across  it;  or  of   removing  certain 

1  It  will  be  observed  that  the  foregoing  analysis,  though  based 
on  English  writers,  is  yet  not  technically  true  of  English  property. 
In  England  the  original  ultimate  property  in  land  is  regarded  as 
residing  in  the  sovereign,  the  private  owner  having  simply  certain 
granted  rights.  Yet  the  analysis  is  practically  applicable  in  Eng- 
land, and  also  technically  so  in  America,  where  private  owners  are 
not  feudal  but  allodial. 


II  THE   FACTORS  IN  DISTRIBUTION  97 

tangible  objects  from  it,  as  wood,  turf,  minerals ;  or 
of  enjoying  certain  profits  or  fruits  of  the  land;  or  of 
restraining  the  owner  from  using  his  land  in  certain 
definite  ways,  such  as  obstructing  a  stream  which 
runs  through  it.  These  rights  are  created  by  con- 
tract or  custom. 

A  pledge  or  a  mortgage  is  a  right  held  by  a  credi- 
tor to  a  definite  portion  of  the  profits  of  the  debtor's 
property.  It  is  a  partial  right  of  ownership  given  to 
a  creditor  in  order  to  secure  him  in  the  repayment  of 
a  loan,  together  with  interest  thereon.  In  the  event 
of  non-payment,  it  gives  a  right  to  compel  a  sale  of 
the  projDcrty,  which  may  lead  to  its  full  ownership; 
l)ut  so  long  as  the  obligations  of  the  debt  are  met, 
the  mortgager  is  looked  upon  as  the  full  owner. 

Trusts  and  contracts  are  looked  upon  as  available, 
not  against  the  whole  world,  but  against  certain 
individuals.  The  trustee  is  bound  by  a  moral  obli- 
gation to  administer  the  property  of  which  he  is 
custodian  for  the  benefit  of  the  person  of  inherence, 
the  cestui-que  trust,  according  to  the  terms  of  the 
trust,  and  the  courts  of  equity  will  enforce  the  obli- 
gation. A  trust  may  become,  thus,  simply  a  method 
of  transferring  in  effect  the  full  right  of  property; 
but  the  law  looks  upon  it  as  only  a  partial  right  of 
property,  the  full  right  still  remaining  in  the  origi- 
nal grantor. 

A  contract  is  an  expression  of  agreement  between 
parties,  with  a  mutual  engagement  to  carry  it  into 
effect.      "The  state   lends    its  force    to   assure    the 


98  THE  DISTRIBUTION  OF  WEALTH  chap. 

performance  of  those  promises  of  which  it  thinks 
fit  to  take  cognisance.  "1  A  contract  has  for  its 
function  the  creation  of  a  right  in  the  widest  sense 
of  the  term,  whether  it  be  a  partial  or  a  full  one. 
Thus  the  promisee  has  a  claim  upon  the  promisor,  if 
it  be  in  a  matter  of  property  rights,  which  amounts 
to  a  partial  ownership  of  the  property,  and  limits  in 
so  far  the  owner's  full  control. 

Inheritance  ^  is  the  right  of  an  heir  to  receive  all 
the  rights  and  duties  of  a  deceased  person.  It  is 
brought  about  either  by  an  involuntary  fact,  the  man's 
death  intestate,  or  by  a  voluntary  act,  the  making  of 
his  will.  Absolute  right  of  property,  if  there  were 
such  a  thing,  would  extend  into  the  future  un- 
limited; but  the  right  to  inheritance,  when  defined 
and  regulated  by  the  state,  or  when  once  granted  by 
the  testator,  limits  the  duration  of  his  control,  and  is 
consequently  a  partial  right  to  be  deducted  from  the 
full  right  of  property. 

These  include  the  principal  partial  rights  which 
may  inhere  in  private  individuals.  They  constitute, 
therefore,  one  class  of  private  ownership  of  property. 
But  it  is  to  be  noticed  that  since  the  state  is  to  be 
looked  upon  as  a  person  capable  of  all  the  legal  rela- 
tions of  private  persons,  these  rights  may  also  belong 
to  the  state.  Yet  in  any  case  they  are  essentially 
private  rights,  because  they  originate,  not  by  virtue 
of  the  sovereignty  of  the  government,  but  out  of  the 
free  right  of  contract  of  individuals.  The  state  in 
1  Holland,  p.  220.  2  Holland,  p.  139  ff. 


II  THE   FACTORS  IN  DISTRIBUTION  99 

these  cases  respects  this  right,  and  phices  itself  on 
the  level  of  a  private  individual  in  entering  upon  a 
contract. 

The  analj'sis  of  the  property  rights  thus  far  will 
expose  the  fallacy  of  those  economic  writers  who 
class  mortgages,  contracts,  etc.,  as  capital.  They  are 
capital,  indeed,  from  the  private  standpoint  —  the 
standpoint  of  distribution  —  but  so  is  the  full  right 
of  property.  If  partial  rights  are  considered  capital, 
why  not  the  full  right  ?  The  peculiar  feature  about 
these  partial  rights  is  that  they  can  be  bought  and 
sold  apart  from  the  valuable  object  to  which  they 
lay  part  claim.  They  are  represented  by  legal  docu- 
ments which  can  be  transferred,  and  which  are  con- 
ceived in  the  fiction  of  the  law  as  being  themselves 
proper  objects  of  absolute  and  full  property,  being 
one  kind  of  res  inco7-porales. 

But  the  dominium^  the  full  ownership,  is  the  own- 
ership not  of  a  part  claim,  but  of  the  valuable  thing 
itself.  When  the  dominium  is  transferred,  the  object 
itself  is  transferred.  It  does  not  exist  apart  from 
the  object. 

This  fact  is  not  sufficient  ground  for  calling  partial 
rights  of  ownership  capital,  and  refusing  the  title  to 
the  full  right.  The  function  of  both  kinds  of  rights 
is  to  secure  for  their  possessor  a  share  of  the  prod- 
ucts and  the  uses  of  the  land  and  capital.  It  is 
acknowledged  that  the  ground  whereon  partial  rights 
are  assigned  to  the  category  of  capital,  is  the  fact  that 
they,  like  any  kind  of  capital,  bring  to  their  owner 


100  THE  DISTRIBUTION  OF  WEALTH  chap. 

a  share  in  the  social  income.  This  is  true,  but  the 
dominium  does  the  same.  Capital  itself  —  the  pro- 
ductive instrument  —  would  not  yield  its  products  to 
any  particular  individual  were  it  not  that  that  indi- 
vidual owns  the  capital.  Ownership,  then,  either 
partial  or  full,  determines  the  direction  and  destina- 
tion of  the  products  and  the  uses  of  the  land  and 
capital,  and  from  the  standpoint  of  distribution, 
both  full  and  partial  ownership  —  the  total  rights 
of  property  —  are  capital. 

In  conclusion,  social  and  private  capital  are  cate- 
gories wholly  different  in  kind.  Capital  from  the 
standpoint  of  production  and  society  consists  of  the 
instruments  and  material  of  production  —  the  things 
themselves,  res  corporales  —  to  be  distinguished 
from  consumption  goods  only  by  the  fact  that  they 
are  either  active  in  creating  utilities  or  passive  in 
receiving  utilities,  while  consumption  goods  are 
being  actually  used  and  are  giving  up  their  utilities 
for  human  enjoyment.  Capital,  from  the  standpoint 
of  distribution  and  of  the  individual,  is  a  his- 
torical institution,  consisting  in  the  ownership  of 
social  capital,  and  comprises  both  those  kinds  of 
partial  ownership  known  as  definite  rights  —  res 
incorporales  —  and  that  full,  indefinite  ownership 
known  as  dominium.  Social  capital  creates  utilities, 
private  capital  distributes  utilities.  They  are  in- 
separable in  practice  because  production  is  essen- 
tially for  the  sake  of  enjoyment,  and  ownership 
has    no    significance    except    as    applying    to    the 


II  THE  FACTORS  IN  DISTRIBUTION  101 

acquisition  of  useful  products,  but  they  are  sepa- 
rable in  analysis,  since  the  destination  of  products 
is  a  conception  distinct  from  the  creation  of  products. 
And,  moreover,  the  value  of  social  products,  besides 
depending  upon  the  physical  qualities  and  circum- 
stances of  these  products,  depends  also  upon  their 
legal  appropriability. 

Section  VIII.  —  Monopoly  Privileges. 

Besides  the  partial  rights  of  ownership,  jurists 
are  accustomed  to  designate  as  res  incorporales 
another  class  of  radically  different  rights,  or  rather 
"closely  coherent  masses  of  rights. "^  These  are 
patents,  copyrights,  trade-marks,  and  franchises.  A 
patent  right  is  "an  exclusive  privilege  of  using  a 
new  process  for  a  fixed  term  of  years ;  and  also  the 
right  of  letting  or  selling  (the)  privilege  to  another." 
A  similar  favour  when  granted  to  authors  of  books, 
to  painters,  engravers,  and  sculptors  is  a  copyright. 
A  trade-mark  is  a  design  which  is  recognised  by  gov- 
ernment as  the  exclusive  property  of  an  individual 
or  private  corporation.  A  franchise  was  originally 
a  royal  privilege,  subsisting  in  the  hands  of  a  sub- 
ject, such  as  the  right  to  have  a  fair  or  market. 
Owing  to  the  modern  development  of  means  of  trans- 
portation, the  franchise  is  principally  a  public  grant 
conferring  a  legal  monopoly  and  the  right  of  emi- 
nent domain  and  expropriation  of  private  property- 

1  Holland,  p.  178  ff. 


102  THE  DISTRIBUTION  OF  WEALTH  chap. 

holders,  and  the  right  to  levy  tolla  and  charges 
for  the  use  of  ^wasi-public  property. 

These  rights  and  privileges  are  neither  capital  nor 
partial  rights  of  ownership;  but  are  exclusive  j^fivi- 
leges  of  selling  goods  or  services.^  They  are  additional 
to  the  property  right  in  capital,  and  are  superimposed 
upon  them.  A  man  may  make  a  sewing-machine. 
The  machine  has  a  certain  value  represented  by  his 
outlay  of  capital  and  labour.  He  may  also  own  the 
exclusive  patent-right  to  make  and  sell  machines  of 
this  pattern.  This  right  is  in  itself  valuable  because 
it  is  a  monopoly  privilege  granted  by  government. 
It  is  not  productive  capital  because  it  is  not  a 
material  object;  but  it  is  a  social  relation  defined 
and  established  by  government.  Its  value  grows 
out  of  the  fact  that  it  gives  its  owner  power  to  limit 
the  production  of  the  article  patented  relatively  to 
the  demand  for  it.  In  this  way  he  can  keep  up  the 
marginal  utility  and  the  price  of  the  article  at  some 
point  above  its  cost  of  production,  so  that  in  selling 
it  he  may  receive  a  surplus,  or  monopoly  profit,  on 
each  unit  of  the  article.  This  principle  underlies 
the  value  also  of  copyrights,  trade-marks,  and 
franchises. 

It  is  a  legal  convenience  to  treat  all  these  masses 
of  rights  as  incorporeal  things,  because  they  are 
valuable  and  can  be  bought  and  sold.  They  can, 
therefore,  be  the  objects  of  partial  and  full  rights  of 
property.  For  this  reason  they  are  an  important 
1  See  Bohm-Bawerk,  Bechte  und  Verhaltnlsse,  p.  124  ff. 


II  THE   FACTORS  IN  DISTRIBUTION  103 

element  in  the  distribution  of  wealth ;  and  are  prop- 
erly classed,  along  with  other  rights  of  property,  as 
private  capital. 

But  artificial  monopolies,  res  i7icorporales,  are  not 
the  only  monopolies.  There  are  others  which  grow 
out  of  the  very  nature  of  modern  industrial  society 
based  on  private  property  in  general,  without  a 
special  act  of  creation  by  government.  These 
are,  1.  Land;  2.  Distributive  industries,  such  as 
railways,  highways,  post-office,  gas-  and  water- 
works, etc.  These  industries  usually  demand  a  pub- 
lic franchise,  and  where  these  franchises  occur,  we 
find  a  combination  of  natural  and  artificial  monopo- 
lies. 3.  Manufacturing  industries,  like  trusts,  which 
become  monopolies  from  sheer  mass  of  capital.  4. 
"  Good-will "  and  allied  business  advantages,  such  as 
business  connections,  reputation,  etc.  "  Good-will  " 
might  be  looked  upon  as  the  monopoly  element  of 
trusts,  and  in  that  case,  the  monopoly  which  gives  it 
is  absolute.  But  it  is  also  characteristic  of  competi- 
tive business,  giving  special  advantages  to  certain 
individuals,  or  corporations  above  those  of  their 
competitors. 

These  natural  monopolies,  as  well  as  the  artificial 
ones,  are  simply  exclusive  privileges  of  selling  goods 
and  services,  and  their  value  is  owing  to  the  same 
cause  that  gives  value  to  artificial  monopolies. 
They  give  their  owners  the  power  of  limiting  the 
supply  relatively  to  the  demand,  and  thus  of  keeping 
the  price  above  the  cost  of  production.     They  are 


104  THE  DISTRIBUTION  OF   WEALTH  chap. 

not  social  capital,  but  monopoly  privileges.  A 
trust,  for  example,  has  property  in  the  capital  —  the 
machinery,  material,  and  product  —  which  it  uses  and 
creates;  but  it  has  also  the  de  facto  monopoly  right 
of  exclusively  making  the  product  and  selling  it. 
This  monopoly  privilege  is  itself  valuable  —  may  be 
worth  much  more  than  the  actual  capital  invested  — 
and  it  may  be  separated  from  the  capital,  not  only 
in  economic  analysis,  but  also  in  business  dealings. 
It  can  be  valued  and  sold  independently  of  the  capi- 
tal, or  ma}^  form  the  basis  for  the  issue  of  bonds  and 
stocks.  From  the  standpoint  of  society  it  is  not 
capital,  but  from  that  of  the  owner  it  is.  The  right 
of  private  property  makes  it  capital  for  him,  because 
this  right  gives  him  power  to  exact  from  society  a 
certain  share  of  the  social  income  above  what  it  costs 
him  to  render  a  return  to  society. 

The  same  is  true  of  the  distributive  industries 
which  enjoy  monopoly  privileges.  They  are  exclu- 
sive privileges  of  selling  certain  services  or  commod- 
ities, and  this  means  the  power  to  limit  the  supply 
of  their  commodity  or  service,  relativel}''  to  the  de- 
mand. They  are  not  capital,  nor  simply  property  in 
capital ;  but  they  are  property  in  a  monopoly  privi- 
lege. 

Land,  viewed  from  the  standpoint  of  distribution, 
differs  from  these  other  monopoly  privileges  onl}^  in 
the  fact  that  it  is  a  material  object.  In  its  signifi- 
cant features  it  is  like  the  others.  It  is  not  capital, 
but  represents  value  over  and  above  the  value  of  the 


II  THE  FACTORS  IN  DISTRIBUTION  105 

capital  employed  upon  it.  Its  main  significance  in 
distribution  is  situation ;  this  means  access  to  mar- 
kets; this  means  exclusive  privileges  of  producing 
and  selling  place-utilities ;  and  this  is  a  social  rela- 
tion. Finally,  the  income  from  land  is  governed  by 
the  same  law  as  that  which  governs  the  incomes  from 
other  monopol}^  privileges,  i.e.  the  law  of  surplus 
product,  or  rent. 

Summing  up  this  review  of  natural  and  artificial 
monopolies  we  have  to  note  the  following  proposi- 
tions :  — 

1.  They  are  not  capital,  but  exclusive  privileges 
of  selling  goods  and  services.  This  privilege  is  of 
paramount  importance  in  modern  society  where 
goods  are  produced,  not  for  direct  consumption  by 
the  producers,  but  for  sale  and  profit. 

2.  They  furnish  opportunities  for  the  profitable 
investment  of  labour  and  capital. 

3.  Their  value  consists  in  the  power  they  give  to 
limit  the  supply  of  their  product  relatively  to  the 
demand  for  it. 

4.  They  may  be  united  in  more  or  less  comjDlicated 
combinations  in  single  enterprises.  A  railway,  for 
example,  may  jDOssess  monopoly  advantages  due  to 
patents,  franchises,  land,  and  good-will. 

5.  They  are,  like  capital,  the  objects  of  the  rights 
of  property,  and  may,  therefore,  be  subject  to  full 
and  partial  ownership.  In  the  case  of  artificial 
monopolies,  the  government  creates  the  monopoh* 
privilege,  and  then  assigns   it   to    individuals,  who 


106  THE   DISTRIBUTION   OF   WEALTH  chap. 

may  transfer  it  by  deed  or  otherwise.  But  in  the 
case  of  natural  monopolies,  the  monopoly  privilege 
arises  simply  by  virtue  of  private  property  in  a  cer- 
tain peculiar  kind  of  material  object. 

6.  Good- will  is  partly  a  natural,  and  partly  an 
artificial  monopoly.  It  originates  in  the  fact  of  jDri- 
vate  property  in  material  objects,  such  as  a  retail  store 
or  a  manufacturing  enterprise.  But  it  can  be  trans- 
ferred separately  from  the  material  object.  In  order 
that  this  may  be  done,  the  law  must  make  it  an 
artificial  monopoly.  It  does  this,  not  by  formally 
creating  a  monopoly  privilege,  but  by  enforcing  the 
private  contract  of  the  seller  not  to  engage  in  the 
same  occupation,  according  to  the  terms  of  the  con- 
tract. 

7.  The  public,  as  well  as  individuals,  may  be 
the  owner  of  land,  capital,  and  monopoly  privileges. 
The  state,  in  its  various  divisions,  is  a  legal  person, 
and  as  such  is  a  subject  of  the  same  rights  as  private 
persons.  This  includes  full  ownership,  which  may 
be  the  ownership  simply  of  material  objects,  as  a 
post-office  building;  or  the  ownership  of  a  natural 
or  legal  monopol}^  such  as  water-works,  streets,  and 
the  post-office  business,  i.e.  the  exclusive  right  to 
supply  water,  maintain  streets,  and  carry  the  mails. 

We  may  now  recur  to  the  distinction  between 
social  and  private  capital.  We  found  that  it  does 
not  consist,  as  Professor  Bolim-Bawerk  maintains, 
in  a  difference  in  the  material  contents  of  the  two 
notions.     So  far  as  the  stock  of  sfoods  is  concerned. 


II  THE  FACTORS  IN  DISTRIBUTION  107 

private  capital  is  identical  with  social  capital.  In- 
dividuals are  simply  agents,  as  it  were,  of  society, 
employing  social  capital  —  productive  goods  — -for  the 
production  of  social  utilities.  The  true  distinction 
is  that  between  capital  as  a  productive  instrument, 
and  property  in  capital.  It  is  property  in  capital 
which  determines  its  character  as  an  instrument  of 
acquisition.  The  ownership  of  capital  and  land,  as 
well  as  other  monopoly  privileges,  whether  the  own- 
ership be  partial  or  full,  determines  the  destination 
of  the  products  and  uses  of  these  instruments  and 
monopolies. 

The  fact  that  the  right  of  property  may  be  public 
as  well  as  private  does  not  affect  this  conclusion. 
The  distinction  between  capital  and  property  in  capi- 
tal still  remains  the  fundamental  one ;  the  former 
having  to  do  with  the  productive  instruments,  the 
latter  with  the  distribution  of  those  instruments  and 
their  products.  Public  property  in  land,  capital, 
and  monopoly  privileges,  is  simply  the  legal  means 
of  determining  that  the  fruits  of  these  instruments 
and  privileges  shall  be  directed  immediately  to  the 
uses  of  government  and  the  whole  people,  instead 
of  to  the  emolument  of  private  proprietors. 

Section  IX.  —  Theories  of  the  Right  of  Property. 

Especial  significance  has  been  given  throughout 
this  discussion  to  the  part  played  by  government 
in  the  distribution  of  wealth.  Government  exerts 
its  influence  through  the  laws  affecting  persons  and 


108  THE   DISTRIBUTION  OF   WEALTH  chap. 

property.  In  order  that  the  function  of  government 
in  the  creation  of  rights  may  be  clearly  apprehended, 
it  may  be  necessary  to  examine  briefly  those  theo- 
ries which  give  a  different  origin.  Especially  with 
regard  to  rights  of  property  various  conflicting  theo- 
ries may  be  noted.  ^ 

1.  The  theory  of  "  natural  right  "  affirms  that  pi'op- 
erty  is  a  necessary  consequence  of  human  person- 
ality, which,  for  its  economic  activity,  requires  a 
dominion  over  material  goods.  Property  is  simply 
the  necessary  extension  of  the  individual  over  exter- 
nal nature.  This  theory  overlooks  several  facts. 
First,  the  great  majority  of  people  have  no  property 
for  the  exercise  of  their  economic  activities.  The  only 
property  they  have  is  consumption  goods,  which  are 
not  used  productively.  On  the  other  hand  there  are 
some  property  owners  who  do  not  produce,  but  get 
an  income  by  loaning  property. 

2.  The  "  labour  theory  "  holds  that  property  is  the 
result  of  labour.  The  labourer  must  have  control 
over  that  which  he  produces,  as  a  condition  of  his 
continuing  to  labour.  Land,  if  it  is  to  be  made  pro- 
ductive, must  be  private  property,  in  order  that  the 
producer  may  be  secure  in  the  enjoyment  of  the  prod- 
ucts of  his  labour.  This  theory  disagrees  with  facts 
past  and  present.  It  may  serve  as  an  ideal  for  legis- 
lation, but  as  an  explanation  of  the  origin  of  prop- 
erty it   fails    signally.     The  largest  accumulations 

1  Wagner,  Lehrhuch,  pp.  535-575;  Conrad,  Haiidworterbtich, 
Eigentiim ;  Proudhon,  What  is  property  9 


II  THE   FACTORS  IN  DISTRIBUTION  109 

of  property  are  found  in  the  ownership  of  those  who 
do  not  labour;  and  shxves,  instead  of  owning  the 
product  of  their  hibour,  are  themselves  owned.  Land 
is  not  owned  by  its  cultivators,  but,  taking  the  civi- 
lised world  at  large,  four-fifths  of  the  land  is  culti- 
vated by  tenants.  Land  and  monopoly  privileges, 
moreover,  are  not  the  products  of  labour,  but  the 
creatures  either  of  nature  or  of  government. 

3.  The  "occupation  theory"  ascribed  property 
rights  to  him  who  first  obtained  possession,  and 
whose  possession  was  recognised  bj^  his  fellows. 
This  theory  does  not  even  account  for  the  origin  of 
property  among  a  primitive  people,  or  a  conquering 
people  like  the  Romans,  who  based  their  title  to  the 
lands  of  their  conquered  enemies  upon  it.  Neither 
does  it  account  for  modern  titles  by  transfer  and  in- 
heritance. The  primitive  origin  of  property  was 
common  ownership,  and  the  title  of  the  Romans 
was  by  conquest. 

4.  The  "legal  theory"  asserts  that  property  can- 
not exist  without  the  state.  Viewed  externally,  it 
is  the  coercive  power  of  the  state  that  creates  and 
enforces  the  rights  of  property.  Viewed  internally, 
it  is  the  purpose  of  the  state  with  reference  to  the 
objects  which  it  wishes  to  attain  which  leads  it  to 
create,  define,  and  enforce  these  rights.  The  three 
preceding  theories  touch  only  the  purpose  of  the 
state  in  the  establishment  of  property  rights.  This 
purpose  depends  upon  the  ethical  and  political  devel- 
opment of  the  particular  state  at  the  particular  time. 


no  THE  DISTRIBUTION  OF  WEALTH  chap. 

The  state  —  ^.g.the  people  or  social  class  who  control 
the  policy  of  the  state  —  may  endeavour  to  realise 
the  right  of  labour  to  its  product,  or  it  may  grant  to 
first  occupiers  a  legal  title  to  their  land.  But  in 
the  end,  the  actual  title  to  property  rests  on  the  sov- 
ereign power  of  the  state  to  enforce  its  decrees. 
"  Ohne  Klage  kein  Recht,  ohne  Executive  keine 
Klage,  ohne  Maclit  keine  Executive." 

It  is  inaccurate,  therefore,  to  speak  of  limitations 
on  the  right  of  property.  There  is,  strictly  speak- 
ing, no  such  thing  as  absolute,  unlimited  right  of 
property,  which  law  steps  in  as  an  afterthought 
to  restrict.  When  property  right  is  originally 
given  by  the  state,  it  is  with  these  restrictions 
already  asserted.  The  state  gives  to  individuals 
a  certain  amount  of  control  over  material  objects, 
reserving  for  itself  and  the  public  at  large  a 
certain  share.  The  amount  of  private  control 
may  be  greater  or  less,  according  to  the  stage  of 
civilisation,  and  the  policy  of  the  government.  In 
this  way  arise  both  partial  and  full  rights  of  owner- 
ship over  material  objects.  But  the  state  does  more 
than  give  rights  of  property  over  material  objects. 
It  creates,  by  virtue  of  its  sovereignty,  certain  exclu- 
sive privileges  of  selling  certain  kinds  of  goods  and 
assigns  these  privileges  to  individuals.  These  are 
strictly  property  rights. 

It  is  the  same  with  personal  rights.  The  rights 
to  life,  liberty,  and  employment  are  not  natural,  but 
acquired.      Government    creates,    defines,    and    en- 


II  THE  FACTORS  IN  DISTRIBUTION  111 

forces  these  rights.  Such  rights  are  not  absolute 
and  unlimited,  but  in  the  very  act  of  their  creation 
government  determines  their  limitations.  A  man 
has  the  right  to  life  as  long  as  he  does  not  mali- 
ciously kill  his  fellow-man.  In  former  days,  his 
riffht  to  life  was  much  more  restricted  than  it  is  to- 
day.  He  has  the  right  to  liberty  so  long  as  he  does 
not  commit  certain  crimes. 

Thus  we  see  that  the  all-powerful  factor  in  the 
distribution  of  wealth  is  the  sovereignty  of  govern- 
ment. The  wants,  abilities,  and  energies  of  men 
operate  within  a  framework  constructed  by  the  laws 
of  the  land.  Labour  and  capital  are  the  primary 
factois  in  the  production  of  wealth,  though  good  and 
bad  laws  are  potent  in  aiding  and  checking  it.  In 
so  far  as  production  is  a  prerequisite  of  distribution, 
so  are  labour  and  capital  factors  in  distribution. 
But  it  is  Law  that  gives  labourers  the  power 
to  acquire  their  own  products.  Law  assigns  capital 
and  land  to  private  or  public  control,  and  thus  gives 
individuals,  or  a  nation  of  individuals,  the  power  to 
determine  the  destination  of  the  fruits  of  capital. 
But  the  ownership  of  land,  and  of  some  combinations 
of  capital  (natural  monopolies),  gives  its  possessors 
certain  monopoly  privileges,  and  law  sustains  them 
in  the  acquisition  of  that  part  of  the  social  income 
which  they  obtain  through  their  monopoly.  Finally, 
government  creates  outright  certain  additional  mo- 
nopoly privileges  (artificial  monopolies),  and  assigns 
them  to  individuals,  or  retains  them  for  its  own 
advantage  and  that  of  its  citizens. 


112  THE  DISTRIBUTION   OF  WEALTH  chap. 

Section  X.  —  Monopoly  Profits  aiid  Taxes. 

The  significance  of  the  arguments  presented  in 
this  chapter  may  be  illustrated  by  reference  to  the 
current  discussions  regarding  the  true  nature  of 
railway  charges.  A  class  of  writers  maintain  that 
railway  charges  are  like  taxes,  and  they  base  this 
opinion  upon  the  fact  that  charges  are  determined, 
not  by  the  cost  of  furnishing  the  service,  but  by  what 
purchasers  can  afford  to  pay.  But  railway  charges 
are  not  different  in  this  respect  from  any  other  class 
of  monopoly  charges.  Fundamentally  they  are  all 
alike  and  are  all  like  taxes. 

A  tax  is  defined  by  Professor  Bastable ^  as  "a  com- 
pulsory contribution  of  the  wealth  of  a  person,  or 
body  of  persons,  for  the  service  of  the  public  powers." 
The  first  half  of  this  definition  is  valid,  but  the 
latter  will  not  stand  the  criticism  of  history.  Taxes 
are  levied  for  other  purposes  besides  the  service 
of  government.  They  are  often  levied  to  protect  or 
discourage  certain  industries  or  practices ;  also  to 
affect  the  distribution  of  wealth,  either  to  centralise 
it,  as  in  the  Middle  Ages,  or  to  diffuse  it,  as  in 
modern  democratic  communities. 

A  tax  differs  from  a  fee  in  that  the  latter  is  a  pay- 
ment for  a  special  service  performed  by  the  officers  of 
government,  and  is  based  on  the  cost  of  the  service ; 
while  a  tax  is  exacted  for  the  general  services  of 
government,  and  is  based  on  ability  to  pay.     But  a 

1  Public  Finance,  p.  243. 


II  THE   FACTORS  IN  DISTRIBUTION  113 

fee  is  not  always  based  on  the  cost  of  tlie  service. 
Sometimes  it  exceeds  the  cost,  and  then  it  is  a  tax. 
This  is  true  of  fees  paid  to  the  patent-office,  of  letter 
postage  in  the  English  post-office,  of  freight  and 
passenger  charges  on  the  Prussian  state  railways,  of 
the  alcohol,  gunpowder,  and  salt  monopolies  of  vari- 
ous European  countries,  and  of  many  other  fees  and 
charges  which  might  be  mentioned.  In  such  cases 
it  would  be  held  by  most  writers,  that  in  so  far  as 
the  charges  are  necessary  to  meet  the  cost  of  service 
they  are  fees,  but  the  excess  above  the  cost  is  a  tax. 

Now,  the  same  ma}'  be  said  of  any  grant  from  the 
sovereign  power  to  individuals,  giving  them  exclu- 
sive privileges  of  selling  goods.  Patents  and  copy- 
rights are  attributes  of  sovereignty  in  the  hands  of 
individuals,  enabling  them  to  tax  the  community  for 
the  use  of  the  patented  or  copyrighted  article.  Such 
a  franchise  involves  the  right  to  limit  the  quantity 
of  goods  produced,  and  thus  to  keep  up  the  margi- 
nal utility  above  the  cost  of  j)roduction.  Should  the 
government  reserve  this  monopoly  privilege  to  it- 
self, as  in  the  French  tobacco  monopoly,  it  would  be 
a  true  tax.  The  eifect  is  the  same  as  when,  in  the 
United  States,  the  government  imposes  a  tax  of 
500%  on  distilled  alcoholic  liquors.  By  its  power  of 
compulsion  it  prohibits  the  sale  of  liquors  on  which 
the  tax  has  not  been  paid,  and  thus  limits  the  sup- 
ply to  such  an  extent  that  the  marginal  value  will 
cover  both  the  cost  of  production  and  the  tax. 

Patents    and   coj)yrights  are    monopoly  privileges 


114  THE  DISTRIBUTION   OF   WEALTH  chap. 

resulting  from  the  express  intention  of  the  legisla- 
ture. But  there  are  other  monopoly  privileges  which 
result  from  the  very  nature  of  private  property 
when  applied  to  certain  kinds  of  objects  under  cer- 
tain industrial  conditions.  This  is  true  of  all  those 
enterprises  which  require  the  privilege  of  eminent 
domain,  such  as  railways,  telegraph  lines,  water  and 
light  supply.  And  when  it  becomes  possible,  under 
the  operation  of  the  laws  regarding  private  property, 
for  aggregations  of  capital  to  maintain  a  monopoly 
of  a  manufactured  or  mineral  product,  it  is  plainly 
the  sovereignty  of  the  state,  through  the  expression 
of  its  will  in  the  laws  of  the  land,  that  supports  the 
monopoly  privilege. 

Moreover,  it  follows  from  the  principle  already 
developed  regarding  the  right  of  property,  that  all 
prices,  whether  regulated  by  cost  of  production  or 
by  what  the  market  will  bear,  are  compulsory  pay- 
ments. If  a  person  takes  from  anotlier  an  article 
which  the  law  declares  is  private  property  without 
j)aying  for  it  what  the  owner  asks,  the  law  calls  in 
the  physical  force  of  society  to  inflict  on  the  offender 
a  greater  expense  than  it  would  have  cost  him  to 
purchase  the  article  outright  on  the  owner's  terms. 
But  it  does  not  follow  that  the  prices  paid  for  all 
goods  are  fundamentally  like  taxes.  Where  compe- 
tition is  free  they  are  more  nearly  like  fees,  being 
regulated  by  the  cost  of  production.  But  in  so  far 
as  they  exceed  the  cost  of  production,  owing  to  the 
control  over  supply  given  by  some  monopoly  privi- 


H  THE   FACTORS  IN  DISTRfBUTION  115 

lege,  they  are  fundamentally  like  taxes.  They  are 
compulsory  payments,  conditioned,  on  the  one  hand, 
by  the  sovereign  franchise,  or  liberty  of  the  right  of 
propert}^;  and  on  the  other  hand,  by  the  urgency 
of  the  public  want  which  the  commodity  satisfies. 
The  unlimited  right  of  property  in  such  a  case  is  the 
freedom  of  the  proprietor  or  monopolist  to  charge 
for  his  services  as  he  wishes  under  the  protection  of 
government. 

But  the  monopolist,  in  practice,  never  has  an  un- 
limited right  of  this  kind.  The  state  itself  may  fix 
prices,  or  the  monopolist  may  be  controlled  by  pow- 
erful conditions  in  his  industrial  environment; 
especially  by  the  fact  that  exorbitant  prices  would 
invite  powerful  competitors,  or  would  compel  the 
public  to  resort  to  substitutes.  Within  these  limits, 
his  charge  may  be  wholly  arbitrary.  But  on  the 
whole  they  are  regulated,  not  by  the  cost  of  the  ser- 
vice, but  by  what  the  market  will  bear,  i.e.  by  the 
value  of  the  service. 

Finally,  these  monopoly  privileges,  when  in  the 
hands  of  government,  form  the  basis  of  taxes  usually 
"for  the  support  of  the  public  powers,"  though  they 
may  be  used  for  other  purposes,  which,  nevertheless, 
are  looked  upon  as  'puhlic.  Likewise,  when  govern- 
ment bestows  these  privileges  upon  private  persons 
or  corporations,  it  is  for  public  purposes  —  the  expan- 
sion of  industry  and  enterprise,  the  encouragement 
of  literature  and  art,  the  ostensible  promotion  of  the 
happiness  of  the  people. 


CHAPTER   III 

DIMINISHING   RETURNS    AND   RENT 

References  :  The  law  of  diminishing  returns  has  been  ably 
criticised  in  the  writings  of  Professor  Patten.  See  his  Premises  of 
Political  Economy^  Philadelphia,  1885 ;  Stability  of  Prices, 
American  Economic  Association,  1890  ;  Theory  of  Dynamic 
Economics,  Philadelphia,  1892.  See  also  Marshall,  Principles  of 
Economics ;  Adams,  Relation  of  the  State  to  Industrial  Action, 
American  Economic  Association,  Vol.  I. 

Section  I.  —  The  Lmv  of  Diminishing  Returns. 

There  are  no  laws  in  Political  Economy  appar- 
ently so  simple  and  yet  so  confused  as  the  so-called 
laws  of  increasing  and  diminishing  returns.  The 
conclusions  which  can  logically  be  drawn  from  them 
are  widely  different  with  different  writers.  There  is 
need,  therefore,  for  a  thorough  analysis  of  the  ideas 
whi(;h  economists  have  in  mind  when  they  speak  of 
these  laws.  If  we  examine  any  one  of  the  classical 
writers  on  this  important  subject,  we  shall  likely 
find  that  he  has  entirely  different  principles  in  mind 
when  he  writes  of  manufactures  on  one  page  and 
agriculture  on  the  other.  He  claims  that  manufact- 
ures follow  the  law  of  increasing  returns,  and  that 
agriculture    follows    that    of    diminishing    returns. 

ii6 


CHAP.  Ill     DIMINISIIIXG  RETURNS  AND  RENT  117 

But  in  the  iuiportaiit  conelu.sioiis  which  he  draws 
from  these  propositions  he  is  thinking  of  entirely 
different  things  in  the  two  industries.  There  are 
at  least  four  different  standpoints  from  which  the 
economist  looks  at  these  laws,  and  the  same  econo- 
mist may  shift  in  turn  from  one  standpoint  to  each 
of  the  other  three.  There  is  one  standpoint  which 
he  takes  in  treating  of  agriculture,  and  from  that  he 
derives  a  universal  law  of  diminishing  returns  for 
that  industry.  But  in  manufactures  he  takes  another 
standpoint,  and  here  he  derives  a  law  of  increasing 
returns.  Yet  if  he  should  take  in  manufactures  the 
standpoint  which  he  took  in  agriculture,  he  would 
find  that  manufactures  also  show  diminishing  returns. 
And  if  he  took  in  agriculture  the  standpoint  wdiich 
he  took  in  manufactures,  he  would  find  increasing 
returns  in  both  industries.  These  four  standpoints 
for  both  increasing  and  diminishing  returns  are  as 
follows :  — 

1.  The  capital  and  labour  of  an  entire  industry 
throughout  a  long  period  of  industrial  development. 

2.  The  capital  and  labour  of  an  entire  industry  at 
a  given  stage  in  the  development  of  skill  and  knowl- 
edge. 

3.  The  capital  and  labour  of  a  single  enterprise  at 
a  given  stage  in  industrial  progress,  without  refer- 
ence to  the  area  of  ground  occupied. 

4.  The  capital  and  labour  invested  on  a  given 
area  of  ground. 

It  is  to  be  noticed  in  all  these  standpoints  that  the 


118  THE  DISTRIBUTION  OF  WEALTH  chap. 

arbitrary  unit  with  reference  to  which  returns  are 
measured  is  a  compound  unit  of  capital  and  labour, 
i.e.  a  "dose  "of  capital  and  labour.  Where  dimin- 
ishing returns  hold  true,  it  is  agreed  that  for  the 
successive  increments  of  the  earlier  investments  of 
capital  and  labour,  there  may  be  increasing  returns ; 
but  for  the  later  increments,  a  condition  of  produc- 
tivity sets  in  where  the  returns  per  increment  become 
proportionally  less. 

Now,  comparing  these  four  standpoints  of  the  laws 
of  increasing  and  diminishing  returns,  in  order  to 
discover  the  way  in  which  they  are  confused,  we 
perceive  that  it  is  from  standpoint  (4)  —  a  given  area 
of  ground  —  that  writers  usually  begin  when  they 
take  up  the  discussion  of  agriculture.  For  example, 
President  Walker  says  in  substance :  ^  "  Suppose  that 
10  labourers,  with  a  certain  outfit  of  tools  and  im- 
plements, are  engaged  in  cultivating  a  given  tract  of 
land  of  100  acres,  producing  2000  bushels  of  wheat 
a  year,  being  20  bushels  per  acre  and  200  bushels  per 
capita.  If  additional  labourers  crowd  into  this  same 
area  for  the  purposes  of  agriculture,  12  labourers 
would  produce  22.8  bushels  per  acre,  15  labourers 
would  produce  27  bushels  per  acre,  and  20  labour- 
ers 32  bushels  per  acre;  but  each  labourer's  share 
would  descend  necessarily  from  200  to  190,  180,  and 
finally  160  bushels." 

Now,  when  transition  is  made  from  agriculture  to 
manufactures,  another  transition  is  tacitl}^  made  from 

1  Political  Economy,  third  edition,  pp.  85,  36. 


Ill  DIMINISHING  RETURNS  AND  RENT  119 

standpoint  (4)  to  standpoint  (1),  (2),  or  (3).  Manu- 
factures and  commerce,  it  is  said,  follow  a  law  of 
increasing  returns,  except  in  so  far  as  they  make  use 
of  raw  material,  which  is  subject  to  diminishing 
returns. 

But  if  we  confine  ourselves  to  the  first  stand- 
point, having  regard  to  the  quantity  of  product,  and 
not  its  value,  we  shall  find  that  agriculture,  as  well 
as  manufactures,  has  constantly  shown  increasing 
returns  per  unit  of  labour  invested.  Otherwise  a 
relatively  decreasing  number  of  agriculturists  could 
not  have  provided  food  and  raw  materials,  not  only 
for  themselves,  but  for  the  nation  at  large,  and 
for  foreign  markets.  In  England  it  is  possible  to 
take  a  large  view  of  the  progress  of  agriculture 
covering,  say,  600  years ;  and  there  we  find  that  the 
product  per  acre  of  staple  crops  has  increased  tenfold. 
And  if  we  take  into  account  the  infinite  new  varie- 
ties of  agricultural  products,  we  can  see  that  the 
productiveness  of  agriculture  as  a  whole,  measured 
per  capita  of  those  engaged  in  the  industry,  has 
steadily  increased. 

The  fact  that  agricultural  products  have  increased 
in  value  while  those  of  manufactures  have  fallen, 
may  be  well  explained,  not  by  recourse  to  a  law  of 
the  general  diminishing  of  agriculture  throughout 
the  world  at  large,  but  by  the  exaggerated  system  of 
private  property  in  land,  which  locks  up  great  estates 
from  cultivation,  or  encourages  speculation  and  short 
leases,  thus  keeping  land  back  from  more  profitable 


120  THE  DISTRIBUTION  OF  WEALTH  chap. 

kinds  of  cultivation. ^  The  difference  between  agri- 
culture and  manufactures,  from  this  first  standpoint, 
is  simply  in  the  different  rate%  of  increase.  In  agri- 
culture there  is  a  physical  barrier  to  production,  con- 
sisting in  the  forces  of  nature,  which,  however,  is 
being  continually  pushed  downward  and  outward; 
and  improvements  in  all  industrial  arts  have  enabled 
agriculture  to  derive  increasing  returns  from  lower 
margins. 

In  manufactures  there  is  also  a  barrier  to  produc- 
tion, consisting  in  the  forces  of  nature  and  society 
which  have  not  yet  been  brought  into  subjection  and 
organisation.  But  this  barrier  is  being  steadily 
overcome.  The  difference  between  agriculture  and 
manufactures,  considered  from  the  first  standpoint, 
is  simply  that  in  manufactures  the  rate  of  increase 
is  greater  than  in  agriculture.  For  the  future  there 
seems  to  be  no  limit  to  this  increase,  until  the  time 
may  come  when  invention  and  progress  shall  cease. 
And  whatever  may  be  said  of  a  future  limit  to  in- 
creasing returns  in  agriculture,  the  past  and  present 
show  that  such  a  limit  has  not  yet  been  reached. 

There  are  many  indications,  too,  that  agriculture 
is  beginning  an  era  of  unparalleled  development 
and  increasing  returns.  Great  corporations  are  en- 
tering this  field,  and,  with  immense  capital  at 
their  command,  they  promise  to  exploit  nature  as 
never  before.  Extensive  sj^stems  of  irrigation  will 
banish  nature's  lottery  of  seasons  and  rains.  Acres 
1  See  Wachenhusen,  drundrenU. 


Ill  DIMINISHING  RETURNS  AND  RENT  121 

of  glass,  and  thousands  of  steam-pipes  and  electric 
currents  will  control  the  temperature.  Chemistry 
and  electricity  will  do  for  agriculture  as  much  as 
they  have  done  for  manufactures.  Biology  will  have 
its  scientific  experts  and  inventors.  There  is  no 
limit  to  what  science,  accumulated  capital,  and  or- 
ganised industry  can  do  for  agriculture.  The  in- 
dustry, as  a  whole,  shows  no  signs  of  diminishing 
returns. 

It  is  from  the  first  standpoint  that  the  important 
conclusion  is  drawn  that  population  tends  to  crowd 
upon  the  means  of  subsistence.  It  is  held  that, 
taking  the  industry  of  agriculture  as  a  whole,  the 
necessity  of  recourse  to  lower  margins  of  cultivation 
is  a  result  of  the  growth  of  population ;  and  that,  as 
population  crowds  into  these  lower  margins,  the 
quantity  of  product  which  labour  produces  must  be 
pro[)ortionately  less.  But,  from  the  considerations 
already  presented,  the  conclusion  is  reached  that 
never  yet  in  civilised  lands  has  the  quantity  of  prod- 
uct per  capita  of  those  engaged  in  agriculture  dimin- 
ished, but  has  steadily  increased.  This  is  due  to  the 
fact  that  invention,  enterprise,  and  accumulation  of 
capital  have  proceeded  faster  than  population;  and 
that,  though  the  margin  of  cultivation  may  be  lower 
to-day  than  in  ages  past,  yet  the  control  of  man 
over  nature  has  more  than  compensated  for  the  dimin- 
ished natural  resources.  One  industry  helps  another. 
Especially  has  progress  in  facilities  for  transporta- 
tion increased  the  productivity  and  economy  of  all 


122 


THE  DISTRIBUTION   OF  WEALTH 


industries.  One  industry  is  not  to  be  looked  upon 
as  isolated.  In  this  way,  taking  all  industries  as  a 
whole,  there  have  been  increasing  returns  throughout 
them  all. 

This  point  may  be  illustrated  by  Diagram  III. 
Let  AB  be  the  quantity  of  capital  and  labour 
which  can  be  profitably  invested  in  the  entire 
industry  of  agriculture  at  a  given  stage  of  agri- 
cultural and  social  efficiency  of   production.      The 

Diagram    III. 


A  B  G  K 

last  increment  invested  will  yield  a  return  BC,  and 
the  entire  investment  yields  ABCD.  If  production 
were  to  increase  without  any  accompanying  increase 
in  efficiency,  diminishing  returns  would  proceed  in 
the  direction  Ca;,  and  the  returns  to  the  entire  in- 
vestment would  be  proportionately  less  than  when 
production  ceased  at  AB. 

But  suppose  there  intervenes  a  growth  in  knowl- 
edge and  skill,  and  a  series  of  inventions  in  agricul- 
tural machinery  and  in  transportation  agencies. 
Every  dose  of  capital  and  labour  now  invested  in 
agriculture  yields  a  greater  return  than  before,  and 


in  DIiMINISIIING  RETURNS  AND  RENT  123 

production  may  be  carried  to  the  point  AG  where  the 
marginal  return  is  as  great  as  it  had  been  at  AB. 
Without  these  inventions  the  return  would  have  been 
only  Ga;,  and  marginal  labour  and  capital  could  not 
have  subsisted  on  that  return. 

Taking  now  the  eJitire  investments  of  labour  and 
capital  in  each  period,  and  comparing  them  with 
their  corresponding  yields,  we  find  that  the  yield 
ABCD  bears  a  smaller  ratio  to  the  investment  AB 
than  does  the  yield  AGFE  to  the  investment  AG. 
The  returns  to  agriculture,  as  a  whole,  have  been 
increased  instead  of  diminished. 

From  the  first  standpoint,  then,  we  take  into 
account  only  the  quantity  of  the  product,  and  we 
conclude  that  the  law  of  increasing  returns  in  a  pro- 
gressive community  is  universal  and  applicable  to  all 
industries.  This  is,  moreover,  the  dynamic  aspect  of 
the  laws  of  increasing  and  diminishing  returns. 

The  second  standpoint  takes  into  consideration  the 
capital  and  labour  invested  in  a  given  entire  indus- 
try at  a  given  stage  in  the  development  of  knowledge 
and  skill.  It  is  world-production  and  world-product 
without  reference  to  improvement  in  the  arts  and 
sciences,  but  taking  for  granted  the  existing  stage 
of  industrial  progress.  This  is  the  static  aspect  of 
the  laws  of  increasing  and  diminishing  returns. 

In  modern  times,  producers  specialise  their  labours 
upon  a  single  kind  of  product;  they  do  not  produce 
to  satisfy  directly  their  own  wants,  but  for  sale  and 
profit.     Their   great  concern,   therefore,  is  to  know 


124  THE  DISTRIBUTION  OF  WEALTH  chap. 

what  amount  of  goods  they  can  sell,  and  what  share 
of  the  social  product  other  producers  will  give  them 
in  exchange.  Out  of  this  demand  for  their  goods 
arises  the  phenomenon  of  Exchange  Value,  or  Price. 
And  so  the  second  standpoint  of  the  law  of  increasing 
and  diminishing  returns  has  two  aspects:  beginning 
with  questions  of  quantity  of  product,  it  makes  a 
transition  to  questions  of  value. 

First  as  to  quantity  of  product.  In  the  present 
stage  of  industrial  progress,  industries  may  be 
divided  into  classes  distinguished  by  increasing 
returns,  constant  returns,  and  diminishing  returns. 
Industries  of  increasing  returns  are  the  distributive 
industries,  like  highways  and  means  of  communica- 
tion and  public  services,  such  as  gas  and  water 
supply.  The  larger  the  enterprise,  the  cheaper  the 
cost  per  unit  of  quantity  of  product.  The  same 
holds  true,  though  in  a  less  marked  degree,  of  man- 
ufacturing enterprises.  These  gradually  approach 
constant  returns,  whose  characteristic  industry  is 
retail  storekeeping.  Industries  of  diminishing  re- 
turns are  the  majority  of  the  extractive  industries. 
Bat  some  of  these  have,  in  very  recent  years,  passed 
from  diminishing  to  increasing  returns.  This  is  due 
to  the  extensive  introduction  of  machinery,  as  in 
mining.  It  is  not  too  imaginary  to  hope  for  a  time 
Avhen  agriculture  itself,  through  the  operation  of 
similar  causes,  may  become  an  industr}^  of  increasing 
returns.  At  present,  however,  under  primitive 
methods,  it  remains,  as  were  manufactures  a  century 
ago,  an  industry  of  diminishing  returns. 


DIMINISHING   RETURNS  AND  RENT 


125 


But  whatever  may  be  the  facts  or  the  prospects  of 
the  several  industries  in  the  matter  of  productive- 
ness, the  effect  is  immaterial  in  our  discussion  of 
value.  When  we  make  the  transfer  to  value,  we 
find  diminishing  returns  universal.  How  this  comes 
about  has  been  demonstrated  in  Chapter  I. 

The  demand  for  every  commodity  shows  a  dimin- 
ishing scale  of  utility.  The  value  of  the  whole 
product  is  determined  by  the  utility  of  the  marginal 
product.  No  matter,  therefore,  what  may  be  the 
increasing  returns  in  quantity  of  product,  providing 
the  scale  of  demand  remains  constant,  the  entrepre- 
neurs of  a  given  commodity  inevitably  run  against 
the  diminishing  value  of  their  total  product.  This 
means  that  inevitably  the  point  will  be  reached 
where  receipts  will  fall  below  costs,  even  though 
costs  themselves  are  diminishing  also.  Costs  do  not 
diminish  at  so  rapid  a  rate  as  value. 

The  following  diagram  will  illustrate  what  is 
meant :  — 

Diagram   IV. 


^"^'^^'^:'/> 

^<:;i^ 

E 

- — ______ 

E' 

K 

^k:::^^ 

D 

13 
> 

X 

126  THE  DISTRIBUTION  OF  WEALTH  chap. 

Let  the  line  Kx  represent  the  production  of  an  in- 
definite quantity  of  some  commodity  of  increasing 
returns.  Let  the  line  B2  represent  the  diminishing 
cost  per  unit  of  product,  and  the  line  Qy  the  dimin- 
ishing utility  of  the  commodity.  If  production  is 
carried  beyond  the  point  H,  the  value  of  the  margi- 
nal product  will  be  less  than  the  cost  of  producing 
the  same,  and  the  value  of  the  entire  product,  repre- 
sented by  the  area  AHDG,  would  be  less  than  its 
cost,  represented  by  AHDB.  But  if  the  production 
be  limited  at  the  point  F,  the  value  of  the  entire 
product  being  AFEB,  would  be  greater  than  its  cost, 
AFKB,  and  there  would  be  a  profit  of  BKE.  Pro- 
duction cannot  profitably  be  carried  further  than, 
say,  AF',  where  the  total  value  of  the  product  AF'E'B' 
would  approximately  equal  the  costs  of  the  total  prod- 
uct, AF'K'B. 

Although  the  demand  of  the  purchasers  for  every 
commodity  is  a  diminishing  one,  yet  there  are  vari- 
ous circumstances  which  make  the  demand  for  differ- 
ent commodities  very  different  in  extent.  The  more 
extensive  the  demand,  the  further  off  is  removed  the 
point  of  equilibrium  where  the  value  of  the  product 
just  compensates  the  cost  of  its  production.  Some  of 
these  causes  are  the  following :  — 

1.  The  kind  of  want  which  the  commodity  satis- 
fies. More  than  one  half  of  the  industry  of  our 
country  is  employed  in  satisfying  the  wants  for  the 
necessities  of  life.  This  class  of  wants  being  most 
intense,   constant,   and   extensive,    requires   greater 


Ill  DIMINISHING  RETURNS  AND  RENT  127 

quantities  of  goods,  measured  by  the  capital  and 
labour  employed,  than  other  classes.  The  demand 
for  comforts  and  luxuries  of  given  kinds  is  more 
quickly  satisfied  when  once  the  necessities  have  been 
assured,  and,  therefore,  capital  and  labour  employed 
in  these  industries  must  be  comparatively  limited. 

2.  The  extent  of  the  market.  In  a  large  country 
it  is  possible  for  larger  enterprises  and  larger  for- 
tunes to  arise  than  in  a  smaller  one  of  the  same 
character  of  population.  Likewise  the  extension  of 
transportation  facilities  over  the  whole  world  has 
opened  up  opportunities  for  mammoth  productive 
enterprises  never  before  dreamed  of.  Owing  to  the 
diminishing  scale  of  utility  in  all  commodities,  the 
wants  of  the  nearest  consumers  may  be  wholly  satis- 
fied with  small  investments  of  capital  and  labour,  and 
the  point  of  no-profits  would  soon  be  reached;  but 
the  extension  into  new  markets  finds  new  consumers 
whose  wants  have  not  been  satisfied  up  to  the  point 
of  profitless  values. 

3.  Efiiciency  of  social  production.  As  the  pro- 
ductivity of  all  industries  increases,  the  producers 
have  greater  quantities  of  goods  which  they  can 
offer  in  exchange  for  a  given  commodity.  A  wealth}- 
community  can  pay  higher  prices  and  purchase 
greater  quantities  of  goods  than  a  poor  one.  And 
thus  as  the  various  employments  of  society  each 
furnish  the  market  for  all  the  others,  it  follows  that 
increased  efficiency  in  any  one  will  be  followed  by 
increased  demand  for  all  the  other  products. 


128  THE  DISTRIBUTION  OF  WEALTH  chap. 

But  this  result  has  a  limited  application.  Sooner 
or  later,  an  increased  ability  to  pay  shows  itself,  not 
in  increased  demand  for  accustomed  articles,  but  in 
a  demand  for  variety  and  improved  quality.  Thus 
the  size  of  a  market  for  a  given  commodity  depends 
upon, — 

4.  The  distribution  of  wealth  and  the  character  of 
the  people.  If  wealth  is  in  the  process  of  concen- 
tration, luxuries  and  personal  services  will  be  de- 
manded instead  of  staples.  More  highly  elaborated 
articles  will  be  required.  But  if  wealth  continues 
diffused,  greater  quantities  of  necessaries  and  com- 
forts will  be  demanded.  The  progress  of  society  has 
shown  a  relatively  decreasing  demand  for  the  prod- 
ucts of  the  agriculturist.  Wants  of  this  kind  are 
fully  supplied  on  the  part  of  those  who  are  able  to 
pay  for  them,  and  their  surplus  share  of  the  social 
product  is  turned  into  exchange  for  more  refined  and 
expensive  commodities. 

5.  The  development  of  new  industries.  This 
gives  emplo3'ment  to  new  workers,  and  creates  a 
demand  for  products  of  all  kinds.  New  industries 
are  the  result  of,  (1)  The  increased  productivity  of 
society,  and  unequal  distribution  of  wealth,  already 
mentioned,  which  creates  a  demand  for  new  and 
improved  comforts  and  luxuries.  (2)  Inventions 
and  discoveries  which  utilise  nature  better,  and 
create  new  opportunities  for  employment.  (3)  In- 
creased use  of  capital.  This  depends  ultimately 
upon  the  growth  of  wealth  in  a  community.     Capital 


in  DIMINISHING   RETURNS  AND  RENT  129 

involves  roundabout  methods  of  production,  and 
large  numbers  of  persons  are  employed  in  the 
management  and  operation  of  this  capital. 

6.  The  prices  of  commodities.  The  demand  of 
society  for  a  given  article  may  be  looked  upon  as 
made  up  of  a  great  many  layers  of  demand.  Every 
possible  ^j^iVg  has  its  corresponding  layer  of  pur- 
chasers. The  higher  prices  indicate  a  narrow  layer, 
where  wants  are  intense,  and  resources  are  great. 
As  we  descend  the  scale  of  prices,  wider  and  wider 
layers  of  purchasers,  with  less  and  less  intense  wants, 
and  less  and  less  resources,  find  it  economical  to 
make  purchases.  The  demand  for  quantity^  there- 
fore, increases  with  the  lowering  of  price  or,  in 
general,  the  quantity  demanded  varies  inversely  as 
the  price. 

These  are  the  main  reasons  why,  in  a  given  stage 
of  industry,  different  kinds  of  products  are  demanded 
by  society  in  different  quantities  having  certain  defi- 
nite proportions  among  themselves.  In  Chapter  II. 
we  have  already  seen  what  are  the  forces  controlling 
the  supplies  of  these  respective  commodities,  and 
out  of  the  balancing  of  these  two  sets  of  forces  — 
relative  demand  and  supply  —  emerges  such  values 
of  commodities  as  the  existing  stage  of  industry  and 
law  may  favour. 

Since,  now,  it  is  with  questions  of  value  we  are 
concerned  in  our  study  of  distribution,  we  put  aside 
the  first  standpoint  of  the  laws  of  diminishing  and 
increasing  returns,  and  begin  our  studies  with  the 


130  THE  DISTRIBUTION  OF  WEALTH  chap. 

second  standpoint.  The  first  standpoint  is  necessary 
in  questions  regarding  the  growth  of  prosperity,  the 
growth  of  new  wants,  and  the  new  means  for  their 
satisfaction.  But  the  second  standpoint  is  the  basis 
for  an  investigation  into  the  distribution  of  this 
prosperity,  whatever  it  may  be,  among  the  members 
of  societ3\ 

The  third  standpoint  may  be  looked  upon  as  an 
analysis  of  the  second.  The  second  comprises  all  of 
the  enterprises  engaged  in  the  manufacture  of  a 
given  kind  of  product,  while  the  third  looks  upon 
these  individual  enterprises  each  by  itself.  The  two 
would,  of  course,  coincide,  and  become  identical  in 
the  case  of  a  monopoly  or  a  trust  which  has  engrossed 
the  entire  world's  supply  of  a  given  product.  But 
this  is  more  ideal  than  real,  because  in  no  known 
case  has  monopoly  extended  so  far.  There  are, 
therefore,  sufficiently  important  distinctions  to  render 
it  profitable  to  discuss  the  third  standpoint  apart 
from  the  second,  and  to  give  a  warning  against  un- 
consciously passing  from  one  to  the  other. 

From  the  third  standpoint,  industries  may  again  be 
considered,  first,  with  regard  to  quantity  of  product, 
and  second,  with  regard  to  value.  From  the  stand- 
point of  quantity,  we  notice  that  a  factory  or  railroad 
can  profitably  extend  its  investments  into  the  millions 
of  dollars,  and  the  opportunities  for  organisation 
become  so  great  as  the  output  increases,  that  there  is 
no  conceivable  limit  to  the  law  of  increasing  returns. 
On  the  other  hand,  it  is  doubtful  whether  an  agricul- 


in  DIMINISHING  RETURNS  AND  RENT  131 

tural  undertaking  at  present  would  be  warranted  in 
going  beyond  a  million.  The  difficulties  of  organi- 
sation and  management  over  a  wide  territory,  the 
topographical  limitations,  the  changes  of  the  seasons, 
and  consequent  difficulty  of  securing  labourers  when 
needed,  and  the  absence  of  any  extended  division  of 
labour,  make  it  impossible  for  a  large  enterprise  in 
agriculture  to  gain  profits  corresponding  to  those  of 
a  similar  enterprise  in  manufacturing  or  transporta- 
tion. Therefore,  looking  at  it  from  the  standpoint 
of  the  capital  and  labour  invested  in  a  single  enter- 
prise, and  having  in  view  questions  of  production 
and  not  of  distribution,  we  are  justified  in  saying 
that  in  agriculture  the  law  of  diminishing  returns 
prevails,  but  in  manufactures  the  law  is  one  of  in- 
creasing returns. 

But  to  the  entrepreneur  the  interest  in  his  busi- 
ness relates  not  to  the  amount  of  his  product,  but  to 
its  value.  The  significance  of  increasing  and  dimin- 
ishing product  lies  only  in  the  fact  that  in  the  former 
there  is  a  tendency  towards  monopol}',  while  in  the 
latter  such  a  tendency  does  not  show  itself.  ^  Now, 
from  what  has  already  been  shown  regarding  the 
second  standpoint,  it  is  easy  to  see  that  every  indus- 
trial enterprise,  viewed  from  the  third  standpoint, 
is  subject  to  diminishing  values.  If  a  single  enter- 
prise is  a  monopoly,  then  the  demonstration  already 
given  for  the  second  standpoint  applies  fully  to  the 
third,  without  further  comment.  And  if  the  enter- 
1  See  Adams,  Belation  of  the  State  to  Industrial  Action. 


132  THE  DISTRIBUTION  OF  WEALTH  chap. 

prise  is  one  of  a  number  of  competitive  undertakings, 
the  same  principles  hold  true.  In  this  case,  world 
prices  are  determined  by  the  supply  of  the  world 
product,  but  inside  the  world  product  each  entre- 
preneur has  his  especial  range  of  customers.  If  he 
infringes  upon  the  territory  of  his  competitors,  he 
can  do  so  only  by  lowering  prices,  or  by  improving 
the  quality  of  his  product.  In  either  case,  he  must 
sooner  or  later  reach  a  point  of  diminishing  returns 
in  values.  And  just  as  the  industry,  as  a  whole, 
may  be  subject  to  diminishing  values,  so  each  of  its 
independent  constituents  may  be  subject  to  the  same 
conditions. 

It  is  important  to  notice  that  in  taking  the  third 
standpoint,  no  reference  is  made  to  the  area  of  ground 
occupied  by  the  undertaking.  In  fact,  all  enter- 
prises, as  they  increase  in  size,  require  increasing 
areas  of  ground.  This  is  the  significant  distinction 
between  the  third  and  fourth  standpoints. 

If,  now,  we  take  the  fourth  standpoint,  that  of  a 
given  area  of  ground,  we  find  that  the  law  of  dimin- 
ishing returns  has  universal  application.  This  is 
true,  first,  regarding  questions  of  production.  No 
matter  what  undertaking  we  examine,  we  find  that 
for  a  given  area  of  ground  the  point  is  sooner  or  later 
reached  where  an  increase  of  product  will  involve 
more  than  a  proportionate  increase  of  expense.  A 
flouring  mill,  occupying  one  acre,  with  a  capacity 
of  1000  barrels  daily,  would  require  more  than  four 
times  the  daily  expense  to  produce  4000  barrels  on 


Ill  DIMINISHING  RETURNS  AND  RENT  133 

the  same  area  ;  its  buildings  must  be  four  times  as 
high  and  much  stronger  in  order  to  accommodate 
the  requisite  increase  in  the  quantity  of  machinery 
and  number  of  labourers.  Elevators  would  be  more 
expensive,  accidents  and  repairs  more  numerous, 
and  rates  of  insurance  higher.  Before  the  capacity 
of  4000  barrels  could  be  reached,  it  would  be  found 
more  profitable  to  purchase  an  adjoining  half-acre, 
in  order  to  secure  the  additional  room  required. 
The  "order  of  cultivation"  here  is  precisely  the 
same  as  in  agriculture.  There  is  a  law  of  increas- 
ing and  then  of  diminishing  returns  for  a  given 
area,  with  subsequent  resort  to  a  lower  margin. 
The  only  difference  that  can  be  discovered  between 
agriculture  and  manufactures,  is  that  in  the  latter 
the  law  admits  of  greater  elasticity. 

The  significance  of  the  distinction  here  insisted 
upon  becomes  further  apparent  when  we  consider 
that,  in  comparing  agriculture  and  manufactures,  we 
must  include  in  the  area  required  for  the  latter  not 
only  the  site  occupied  by  the  factory,  but  also  the  area 
necessary  for  housing  the  employes.  In  a  farmer's 
business  the  value  of  the  land  occupied  by  dwellijigs 
for  himself  and  employes  is  necessarily  included  in 
the  total  value  of  his  farm  for  industrial  purposes. 
Apart  from  the  latter,  his  residence  site  has  no  value. 
Payment  of  ground  rent  does  not  come  out  of  either 
his  own  profits  or  his  employe's  wages.  But  in 
the  case  of  city  employes,  one  sixth  to  one  third  of 
their  wages  goes  to  i3ay  rent.     The  area  occupied  by 


134  THE  DISTRIBUTION   OF  WEALTH  chap. 

the  dwellings  of  the  employes  is  economically  as 
much  a  part  of  the  area  necessary  for  the  factory  as 
is  the  farmer's  dwelling  site  a  part  of  his  farm. 
Every  extension  of  a  manufacturing  enterprise  neces- 
sitates additional  area  for  employes'  dwellings, 
and  the  economic  result  is  the  same  as  if  the  same 
area  were  added  to  the  factory  itself. 

The  law  of  rent  is  a  deduction  from  the  law  of 
diminishing  returns.  It  is,  therefore,  of  supreme 
importance  in  all  discussions  upon  rent  to  adhere 
strictly  to  this  fourth  standpoint.  We  have  thus 
a  common  basis  of  measurement  for  all  industries. 
In  order  to  show  further  its  importance,  it  may 
be  well  to  notice  some  objections  to  the  law  of 
rent  as  usually  stated,  which,  however,  disappear 
when  we  plant  ourselves  consistently  upon  the 
fourth  standpoint.^ 

1.  If  diminishing  returns  apply  only  to  agricul- 
ture, there  can  be  no  law  of  rent  for  manufacturing 
and  mercantile  sites.  On  the  contrary,  rent  could 
rise  to  infinity  in  manufactures,  so  far  as  quantity 
of  product  is  concerned.  If  the  returns  here  are 
constantly  increasing,  there  is  no  reason  why  the 
rent,  measured  in  product,  should  not  be  correspond- 
ingly unlimited.  But  there  is  a  limit,  as  already 
shown,  to  the  increase  of  returns  for  every  industry. 
The  solution  of  the  difficulty  is   found   in  rigidly 

1  The  argument  can  here  be  stated  only  on  the  negative  side. 
Its  full  significance  will  appear  in  Chapter  IV.  when  we  take  up 
the  positive  answer  to  the  problem  of  rent  and  distribution. 


Ill  DIMINISHING   RETURNS  AND  RENT  135 

maintiiiniiig  the  fourth  standpoint  of  increasing  and 
diminishing  returns,  in  contempkiting  both  agricul- 
tural and  other  industries,  so  long  as  we  are  discuss- 
ing problems  of  rent.  When  we  take  up  the  question 
of  profits  of  other  monopolies  analogous  to  rent,  we 
are  compelled  to  take  the  third  standpoint,  as  will 
be  shown  later. 

2.  There  is  no  actual  margin  of  cultivation,  ac- 
cording to  which  the  rent  of  superior  lands  may  be 
measured,  as  is  contemj^lated  by  the  current  theory. 
All  land,  as  soon  as  it  is  cultivated  at  all,  bears  some 
rent,  and  has  some  value.  Says  Professor  Patten :  ^ 
"That  the  poorest  land  in  cultivation  should  pay  no 
rent,  requires  that  there  should  be  no  other  purpose 
than  cultivation  to  which  the  land  can  be  put.  This 
is  rarely,  or  never,  true,  as  man  does  not  subsist  alone 
on  cultivated  plants,  such  as  wheat,  oats,  and  corn, 
but  also  on  plants  that  require  no  cultivation,  and  on 
animals  that  can  live  on  uncultivated  land;  he  also 
has  use  for  lumber  and  fuel,  and  the  trees  from  which 
they  are  obtained  grow  on  untilled  land.  When 
land  is  needed  for  cultivation,  it  cannot  be  had  for 
nothing,  since  it  is  valuable  to  its  owners  for  other 
purposes.  Upon  uncultivated  land,  for  instance, 
cattle  and  sheep  can  be  kept.  Persons  who  wish  to 
cultivate  land  must  compete  with  those  who  wish  the 
land  for  grazing  purposes,  and  as  all  lands  that  can 
be  cultivated  can  be  used  for  pasture,  and  will  yield 
the  usual  profit  and  leave  something  for  rent,  those 
1  Premises  of  Political  Economy,  p.  22. 


136  THE  DISTRIBUTION  OF  WEALTH  chap. 

who  wish  to  till  the  land  must  be  able  to  bid  over 
the  herders  in  their  offers  of  rent." 

3.  Even  if  there  were  a  margin  of  cultivation,  the 
rates  of  interest  and  wages  on  that  margin  would  be 
higher  than  the  rates  nearer  the  centres  of  industry. 
Hence  the  surplus  remaining  above  wage  payments 
and  interest  for  the  rent  of  land  with  a  given  pro- 
ductivity of  capital  and  labour  must  be  less  than  the 
surplus  remaining  from  an  equal  productivity  where 
wages  and  interest  are  lower.  The  current  statement 
does  not  co-ordinate  with  the  fact  of  the  varying  local 
rates  of  wages  and  interest,  but  assumes  a  fixed  world- 
wide rate  for  each. 

4.  In  order  to  get  a  law  of  rent  for  building-lots, 
it  is  necessary  to  go  back  to  agricultural  rents.  For 
example,  Professor  Mac  Vane  says :  ^  "  The  new  build- 
ing lots  in  the  outskirts  of  a  city  may  be  regarded  as 
having  their  rent  determined  roughly  b}^  the  agricul- 
tural rent  of  the  land.  .  .  .  At  the  meeting  line  of 
the'  two  kinds,  the  difference  of  rents  must  always  be 
slight.  .  .  .  Tlie  economic  rent  of  each  more  cen- 
tral lot  is  equal  to  the  rent  of  an  equal  area  in  the 
outskirts,  plus  the  equivalent  of  its  special  advan- 
tages over  the  latter."  So  that  ultimately  we  are  to 
conclude  that  the  law  of  rent  for  lots  on  Wall  Street 
depends  on  the  returns  to  labour  and  capital  on  an 
imaginary  margin  of  cultivation  somewhere  near  the 
Rocky  Mountains ! 

A  positive    reason    for    taking  the  standpoint  of 
1  Political  Economy,  p.  307. 


Ill  DIMINISIIIXG   A' E  TURNS  AND  KENT  137 

area  is  the  fact  that  hind  is  valuable,  primarily, 
because  it  furnishes  only  room  and  situation. ^ 
This  is  practically  all  that  is  furnished  in  agri- 
culture, and  notoriousl}^  all  that  is  furnished  in 
other  industries.  These  are  its  only  '-original  and 
indestructible  powers."  Soil  is  capital^  and  its 
returns  are  governed  by  the  same  law  as  that 
which  governs  returns  from  machinery.  Ricardo 
and  his  followers  have  developed  their  law  of 
rent  from  the  circumstances  of  a  new  country 
where  "there  is  an  abundance  of  rich  and  fertile 
land."  But  new  land  is  not  the  normal  condition 
of  agriculture.  After  the  first  generation  of  settlers 
the  original  qualities  have  been  worn  out,  and  what- 
ever remains  is  due  to  the  productive  power  of  labour 
and  capital.  This  must  be  renewed  and  repaired 
every  year  like  machinery.  In  the  case  of  soil  the 
forces  of  nature,  which  are  utilised  and  economised 
by  labour,  are  summed  up  in  the  attributes  fertility 
and  vital  forces;  in  machinery  these  forces  are  cohe- 
sion, attraction,  heat,  electricity,  which  appear  in 
the  forms  of  water-power,  steam,  and  electric  motors. 
Agriculture  and  manufactures  are  simply  two  differ- 
ent ways  of  utilising  the  forces  of  external  nature. 
In  each  case,  "  putting  things  into  fit  places  for  being 
acted  upon  by  their  own  internal  forces,"  is  all  that 
man  can  do.  The  gifts  of  nature  become  capital  as 
soon  as  they  are  utilised  by  man.  Before  they  are 
utilised  they  have  no  economic  significance,  and  are, 
1  See  Chap.  II. 


138  THE  DISTRIBUTION   OF  WEALTH  chap. 

therefore,  neither  capital  nor  land,  in  the  economic 
use  of  those  terms.  By  adhering  to  the  standpoint 
of  a  given  area  of  ground  we  keep  this  fact  before 
us,  and  are  able  to  utilise  directly  the  definition  of 
land  already  adopted  as  connoting  only  room  and 
situation.  Both  critical  and  positive  reasons,  then, 
seem  adequate  for  carefully  establishing  ourselves 
upon  our  fourth  standpoint  when  investigating  ques- 
tions of  rent. 

It  will  be  noticed  that,  in  consonance  with  the 
classical  treatment  of  the  subject,  diminishing  returns 
are  found  to  appear  in  the  qiiantity  of  the  product 
which  can  be  produced  on  a  given  area.  But  it  will 
not  be  difficult  to  show  that  in  taking  the  fourth 
standpoint,  —  a  given  area  of  ground,  —  we  are  also 
concerned,  as  in  the  third  standpoint,  not  with  dimin- 
ishing product  but  with  diminishing  value.  The 
landowner  does  not  produce  goods  for  his  own  con- 
sumption, but  for  sale.  Hence  his  land  is  valuable 
to  him  in  proportion  to  the  exchange  value  of 
the  product.  Now,  our  fourth  standpoint,  compared 
Avith  our  third,  has  this  important  limitation, 
that  a  given  area  of  ground  does  not  usually 
afford  room  for  the  production  of  so  large  a 
supply  of  goods  as  to  affect  the  general  prices  of 
those  goods.  The  prices  of  products  are  determined 
by  the  general  forces  of  society,  operating  throughout 
the  world,  as  shown  in  describing  the  second  stand- 
point. So  far,  then,  as  a  given  area  is  concerned, 
the  price  per  unit  of  its  product  changes   so   little 


Ill  DIMINISHING  KETURNS  AND  RENT  139 

that  we  may  regard  it  as  fixed  and  constant. 
The  total  value  of  its  product  varies,  therefore,  ex- 
actly in  proportion  to  the  quantity  of  the  product, 
and  as  this  is  subject  to  the  law  of  diminishing 
returns,  so  also  must  be  its  value. 

But  there  is  a  stronger  reason  for  holding  that 
the  essential  and  common  element  in  diminishing 
returns  on  a  given  area  of  ground,  is  the  value  of 
the  product,  and  not  the  quantity.  The  essential 
feature  of  land,  viewed  from  the  standpoint  of  dis- 
tribution, is  situation.  Situation  is  simply  access 
to  markets.  The  size  of  a  market  depends  upon  the 
number  of  purchasers  who  compose  it,  and  their 
wealth.  An  area  of  ground  situated  at  the  centre 
of  a  great  population,  offers  access  to  a  wide  market, 
while  the  same  area  on  the  outskirts  of  cultivation, 
has  a  very  limited  access.  Wliat  the  landowner 
sells  to  his  customers  is  place-utility.  Place-utility 
commands  a  monopoly  value,  and  is,  therefore,  a 
surplus  above  the  cost  of  production  of  the  articles 
in  which  it  inheres.  The  total  amount  of  this  sur- 
plus, producible  on  a  given  area  of  a  given  situation, 
must,  therefore,  depend  upon  the  number  of  cus- 
tomers who  find  this  situation  most  convenient  for 
making  their  purchases,  and  on  the  wealth  of  these 
customers.  It  requires  an  investment  of  capital  and 
labour  to  supply  the  wants  of  these  purchasers,  and 
the  amount  of  capital  and  labour  that  can  be 
profitably  invested,  depends  upon  the  extent  of  this 
want. 


140  THE    DISTRIBUTION  OF  WEALTH  chap. 

Now,  granted  that  a  given  area  of  given  situation 
offers  a  very  large  market,  it  would  be  impossible  to 
make  correspondingly  large  investments  were  it  not 
that  modern  industry  makes  possible  in  certain  enter- 
prises a  wonderfully  intensive  concentration  of  capital 
and  labour  on  limited  areas.  The  business  manager 
accomplishes  this  object,  where  the  situation  gives 
access  to  large  markets,  by  changing  the  character 
of  his  industry  to  suit  his  situation.  Industry  being 
carried  on  for  profit,  the  character  of  the  enterprise 
is  indifferent  to  him  —  he  will  change  readily  from 
an  extensive  to  an  intensive  enterprise,  if  the  latter 
promises  higher  profits.  We  must  look  upon  all 
capital  as  one,  its  essential  attributes  being  value  and 
productivity.  But  though  one  in  essence  it  is 
protean  in  phenomena.  It  takes  on  all  sorts  of 
forms,  and  changes  from  one  form  to  another 
according  to  the  wants  of  society  and  the  situation 
where  it  is  invested,  the  main  purpose  being  to 
produce  that  aggregate  of  value  which  the  given 
situation  warrants. 

The  total  aggregate  of  value,  which  can  be  pro- 
duced on  a  given  area,  depends  on  two  factors.  1. 
The  kind  of  goods  that  are  produced,  with  regard 
to  the  amount  of  value  which  can  be  condensed  into 
a  given  unit;  and  2,  the  quantity  of  such  goods, 
which  can  be  produced  on  the  given  area.  The  ulti- 
mate condition  in  each  factor  is  the  intensity  of  the 
industry  which  it  is  possible  to  adopt.  It  is,  again, 
the    situation   of    the   land    which    determines   how 


Ill  DIMINISHING  RETURNS  AND  RENT  141 

intensive  the  enterprise  must  be,  and  what  must  be 
its  character.  Forest  and  pasture  land  occupy  the 
lowest  position.  They  are  on  or  near  the  margin 
of  cultivation.  Very  little  investment  of  capital 
and  labour  can  be  profitably  made  on  them.  This 
corresponds  with  the  fact  that  they  are  far  removed 
from  the  centres  of  population.  Both  the  extensive 
character  of  their  cultivation  and  the  limited  demand 
for  their  place-utility,  co-operate  to  bring  in  very 
soon  the  point  of  diminishing  returns. 

Land  cultivated  with  the  plough  presents  but  little 
variety  respecting  the  amount  of  capital  and  labour 
applied  to  it  yearly.  In  Ohio  the  yearly  investment 
on  wheat  land,  including  cost  of  seed  and  fertilisers, 
ploughing,  harvesting,  and  marketing,  ranges  from  ten 
to  fifteen  dollars  per  acre.  In  Nebraska  and  Dakota 
it  ranges  from  five  to  seven  dollars  per  acre.  Ohio 
being  nearer  the  market  for  wheat,  it  pays  to  invest 
more  capital  in  its  production,  while  in  Nebraska 
and  Dakota  land  is  nearer  the  margin  of  cultivation, 
and  it  does  not  pay  to  invest  so  much. 

As  we  come  nearer  to  city  markets,  we  find  that 
it  is  profitable  to  invest  larger  quantities  of  capital 
and  labour  on  the  land.  The  character  of  produc- 
tion changes,  cultivation  becomes  more  intensive, 
spades,  hoes,  and  rakes  are  used  in  addition  to 
ploughs  and  harrows,  and  great  quantities  of  fertili- 
sers and  costly  seeds  make  up  a  larger  use  of  capi- 
tal. Instead  of  from  five  to  fifteen  dollars  annual 
investment,  it  ranges,  in  vegetable  gardening,  from 


142  THE  DISTRIBUTION   OF  WEALTH  chap. 

twenty-five  and  thirty  to  fifty  and  a  hundred  dollars 
per  acre. 

Land  that  is  suitable  for  the  use  of  factories  is 
farther  away  from  the  margin  of  cultivation  than 
arable  and  most  vegetable  lands.  It  is  nearer  the 
city,  most  of  it  within  the  suburbs  of  cities.  Here 
are  to  be  found  the  advantages  of  transportation, 
water-power,  access  to  fuel  and  labour  markets. 
With  manufacturing  industries  there  is  a  great  dif- 
ference respecting  the  amount  of  investment  which 
can  be  profitably  applied.  Factories  in  the  suburbs 
will  be  one  or  two  stories  high,  while  those  of  the 
city  will  be  three,  four,  and  five  stories.  On  one 
acre  in  the  suburbs  there  may  be  one  hundred  la- 
bourers employed,  and  a  yearly  investment  of  labour 
and  capital  of  |i500,000.  In  the  city  there  may  be 
500  labourers  on  one  acre,  and  a  yearly  investment 
of  one  million  or  moie.  The  advantages  of  this  land 
are  such  that  it  no  longer  pays  to  use  it  merely  for 
wheat  or  vegetables.  It  paj-s  to  apply  a  mnch  larger 
number  of  increments  of  capital  and  labour  per  acre, 
than  can  be  applied  in  farming  or  truck  growing,  and 
this  is  done  b}^  adopting  a  more  intensive  industry. 
But  finall}',  just  as  in  the  previous  industries,  there 
comes  a  point  where  further  investments  will  yield 
a  less  than  proportionate  return,  and  at  last  a  margin 
of  profitable  investment  is  reached  where  it  no  longer 
pays  to  apply  further  increments.  If  the  owner  has 
more  capital  to  invest,  he  seeks  new  fields ;  perhaps 
invests  in  farming  near  the  margin  of  cultivation, 


Ill  DIMINISHING  RETURNS  AND   RENT  143 

or  goes  into  some  other  industry  wliich  has  not  yet 
reached  the  margin  of  profitableness. 

Commerce  and  exchange,  including  wholesale  and 
retail  business  and  banking,  require  the  best  locali- 
ties available.  They  represent  the  heaviest  concen- 
tration of  capital  and  labour.  The  buildings  are  of 
great  height  and  expensive,  thousands  of  employes 
and  cleiks  can  be  concentrated  on  one  acre,  and 
these  represent  some  of  the  highest  paid  labourers, 
such  as  salesmen  and  expert  clerks.  The  character 
of  the  capital  is  the  most  expensive,  such  as  finished 
goods  in  retail  stores  ready  for  consumers,  and  in 
banks  we  have  gold  and  silver  money,  notes,  certifi- 
cates, and  other  evidences  of  property,  the  highest 
possible  condensation  of  wealth.  ^Millions  of  dollars 
and  credits  pass  through  these  offices,  and  the 
wealthiest  men  of  the  country  are  assembled  on  these 
narrow  areas.  But  even  here,  on  the  site  best  located 
of  all,  there  is  a  stage  of  diminishing  returns,  and  a 
limit  beyond  which  it  is  no  longer  profitable  to  invest 
capital  and  labour. 

To  sum  up  this  discussion,  the  entrepreneur  pro- 
duces goods,  not  for  the  sake  of  the  goods  them- 
selves, but  for  their  values.  Therefore,  as  the  sit- 
uation of  land  changes  from  regions  where  there 
is  little  demand  for  place-utility  to  sections  where 
the  demand  is  great,  the  character  of  cultivation 
changes  from  the  extensive  to  the  intensive,  from 
raw  material  to  more  and  more  finished  goods, 
whereby  greater  and  greater  values  are  produced  on 


144  THE  DISTRIBUTION  OF  WEALTH  chap. 

given  areas.  But  in  all  these  cases,  the  stage  of 
diminishing  returns  for  a  given  area  of  ground, 
though  further  and  further  postponed,  yet  on  account 
of  the  jphysical  conditions  of  production,  and  the 
inevitable  demand  for  room,  is  sure  eventually  to 
come. 

Thus  it  can  be  seen  that  in  the  fourth  standpoint 
as  with  the  third,  it  is  the  extent  of  the  demand  for 
commodities  that  determines  the  range  and  period 
of  diminishing  returns.  This  is  the  common  and 
significant  feature  in  the  law  of  diminishing  returns, 
and  it  is  a  phenomenon  of  value  instead  of  product. 
Upon  it  is  based  the  whole  theory  of  the  distribution 
of  wealth. 

In  order  to  bring  out  more  fully  the  distinctions 
between  the  four  standpoints,  we  may  review  the 
conclusions  already  reached,  and  add  several  other 
important  considerations. 

1.  Tlie  first  standpoint — that  of  an  entire  indus- 
try through  a  'long  period  of  time  —  has  no  direct 
significance  in  the  theory  of  distribution.  Its  impor- 
tance lies  in  the  study  of  the  growth  of  prosperity. 
The  second  standpoint  has  an  important  part,  be- 
cause it  furnishes  the  means  for  determining  the 
exchange  values  of  social  products.  The  third  and 
fourth  standpoints  are  the  essential  ones  in  a  theory 
of  distribution.  They  are  the  standpoints  of  the 
individual,  and  are,  therefore,  the  basis  for  deter- 
mining the  individual's  share  of  the  social  product. 
The  individual  is   concerned  with  the  value  of  the 


HI  DIMINISHING  RETURNS  AND  RENT  145 

social  product  which  he  contributes  to  society,  that 
is  to  say,  with  the  quantity  of  other  products  which 
he  receives  in  exchange  for  his ;  and  the  significance 
of  diminishing  returns,  therefore,  lies  not  in  diminish- 
ing product,  but  in  diminishing  values. 

2.  Cost  of  production,  when  viewed  from  the  first 
standpoint,  is  "  real  "  or  "  metaphysical"  cost.  It  is 
the  sacrifice  and  effort  endured  by  the  producers. 
It  is  cost  viewed  from  the  standpoint  of  society.  ''  It 
represents  what  man  parts  with  in  the  barter  be- 
tween him  and  nature."  It  is  composed  of  three 
elements.  1.  Labour,  which  is  measured  by  the 
time  and  intensity  of  the  aggregate  work  of  society. 

2.  Abstinence,  measured  by  the  time  of  the  wait- 
ing and  the  intensity  of  present  pleasures  foregone. 

3.  Risk,  "  a  hardship  inseparable  from  the  exercise 
of  either  labour  or  abstinence."  ^ 

Cost  viewed  from  this  standpoint  furnishes  the 
ultimate  measure  of  utility,  but  not  the  measure  of 
value.2  This  is  true,  also,  of  the  second  standpoint 
so  long  as  we  remain  in  the  region  of  questions  of 
production.  Society  may  be  looked  upon  as  a  single 
producing  body,  and  social  labour  and  abstinence 
as  the  effort  it  makes  to  satisfy  its  varied  wants. 
With  a  given  stage  of  the  arts  and  industries,  and  a 
corresponding  efficiency  of  labour,  society  produces 
goods  along   all    the   lines  of   production,  until  the 

1  Andrews,  Institutes  of  Economics,  p.  76. 
'  See    article    by    Professor   J.    B.    Clark,   in     Yale    Review, 
November,  1892,  on  The  Ultimate  Standard  of  Value. 


146  THE  DISTRIBUTION  OF  WEALTH  chap. 

marginal  utilities  of  all  are  equal.  A  given  unit 
of  the  social  cost  of  production,  is  the  standard  for 
measuring  the  marginal  utilities  of  all  these  products. 
But  this  is  "  a  highly  indefinite  notion,"  and  "  defies 
computation."  Its  usefulness  as  an  economic  con- 
ception does  not  pertain  to  the  distribution  of  wealth, 
but  to  its  production.  When  we  pass  to  questions 
of  distribution,  as  we  do  in  the  second  half  of  the 
second  standpoint,  and  in  the  third  and  fourth 
standpoints,  cost  becomes  exjjenses  of  production. 
Expenses  may  or  may  not  correspond  with  real 
cost.  In  most  cases  there  is  no  correspondence. 
Expenses  of  production  are  determined  by  the  rela- 
tive power  of  limiting  supply,  and  real  cost  of  pro- 
duction is  only  one  of  many  forces  which  give  power 
over  supply. 

In  ordinary  business  dealings  the  term  "  cost  of 
production"  is  used  in  the  sense  of  "expenses," 
and  it  would  be  convenient  to  follow  this  usage. 
But  clearness  demands  that  we  have  distinct  terms 
for  distinct  conceptions,  and  the  terms  "  cost  of 
production "  and  "  expenses  of  production "  will  be 
hereafter  employed  as  above  indicated. 

3.  An  apparent  inconsistency  between  diminishing 
product  and  diminishing  value  exists  in  the  fact 
that  in  the  case  of  product  alone,  a  diminishing 
return  on  the  latter  increments  invested  on  a  given 
area  of  ground  does  not  reduce  the  quantity  of  the 
return  to  the  earlier  increments.  But  in  the  case  of 
value,  when  the  value  of  the  marginal  units  of  pro- 


DIMINISHING  RETURNS  AND  RENT 


147 


ductioii  has  been  brought  down  by  increasing  the 
supply,  the  value  of  each  and  all  the  other  units  of 
product  has  been  brought  down  to  the  same  figure. 
Diagram  V.  is  drawn  in  such  a  way  as  to  illustrate 


Diagram  V. 


the  current  demonstrations  of  diminishing  returns. 
In  this  diagram  ad  represents  one  dose  of  capital  and 
labour,  and  ah  the  total  number  of  doses ;  he  repre- 
sents the  quantity  of  product  produced  by  the  mar- 
ginal dose.     The  returns  to  the  earlier  doses  follow 

DlAGRAiM    VI. 


the  line  ec,  and  the  returns  to  all  the  doses  are 
represented  by  the  area  aech.  Diagram  VI.  is  drawn 
to  represent  the  value  of  the  product  of  an  enterprise 
of  increasing  returns  as  it  would  appear  if  explained 


148  THE  DISTRIBUTION   OF  WEALTH  chap. 

according  to  the  current  theories.  Here  the 
value  of  the  product  produced  by  the  last  dose  is 
Vc\  This  being  the  marginal  product,  its  value 
determines  the  value  of  each  of  the  preceding  units 
of  product.  Supposing  now,  that  we  are  dealing 
with  an  enterprise  of  increasing  product,  it  follows 
that  the  returns  in  product  on  the  earlier  doses  are 
less  than  on  the  marginal  dose,  and  the  return  to 
successive  doses  would  be  represented  by  the  line 
fc'.  But  the  value  per  unit  of  product  is  equal 
throughout.  Consequently  the  value  of  the  returns 
on  the  earlier  doses  must  be  less  than  on  the 
marginal  dose,  and  the  values  of  successive  doses 
would  also  be  represented  by  the  line/c-'.  The  total 
value  would  be  represented  by  the  area  a'h'c'f^ 
which  would  be  less  than  the  total  cost,  a'b'c'd'.  It 
would  appear,  therefore,  that  the  analogy  between 
diminishing  value  and  diminishing  product  fails,  and 
that  if  values  were  diminishing  like  product  the  curve 
of  value  would  be  e'c"c'  instead  of  fc',  and  the  total 
value  would  be  a'e'c'b'  instead  of  a'b'c'f. 

The  apparent  difficulty  is  in  the  technicalities  of 
the  theory,  and  not  in  reality.  The  theory  makes 
assumption  of  increments  of  investment  throughout 
the  entire  enterprise,  and  assigns  certain  definite 
portions  of  product  to  each  increment.  In  reality,  a 
business  man  does  not  proceed  in  exactly  this  way. 
He  knows  nothing  of  different  rates  of  profits  on  dif- 
ferent increments  of  his  investments,  but  he  averages 
his  total  profits  upon  the    basis  of   his  total  invest- 


Ill  DIMINISHING  RETURNS  AND  RENT  149 

ments.  He  speaks  of  average  returns,  and  not  of 
increasing  and  diminishing  returns.  When  profits 
get  so  low  as  to  reduce  his  average  returns,  then  he 
begins  to  retrench.  This  is  the  only  way  he  has  of 
calculating-  the  returns  to  marmnal  investments.  In 
this  way  an  agricultural  enterprise  is  exactl}^  like  a 
manufacturing  one,  and  the  returns  in  both,  being 
estimated  in  values  rather  than  in  quantities,  show 
the  same  phenomena  of  increase  and  diminution. 

Now,  in  an  industry  of  increasing  product,  so  far 
as  product  is  concerned,  the  additional  increments 
are  to  be  credited  Avith  a  larger  share  of  product 
than  the  preceding  ones  ;  but  since  these  later  incre- 
ments are  also  the  efficient  cause  for  a  reduction  in 
value  both  of  the  units  of  product  which  they  have 
contributed  and  also  of  all  preceding  ones,  the  entire 
reduction  of  value  is  to  be  charged  to  them.  This 
is  practically  the  case  in  agriculture  or  diminishing 
product.  A  point  is  reached  where  the  average 
return  to  all  increments  is  found  to  diminish,  but  we 
attribute  the  reduction  not  to  a  diminished  produc- 
tivity of  earlier  increments,  as  well  as  the  later, 
but  only  to  a  diminished  productivity  of  the  last 
increments. 

Diminishing  return,  even  when  applied  to  prod- 
uct, does  not  really  mean  that  in  a  given  round  of 
production — say  one  year's  croj)  of  wheat  —  there 
are  certain  so-called  earlier  increments  which  yield  a 
larger  product  than  so-called  later  increments.  But 
it  means  that   should   additional  increments  be  em- 


150  THE  DISTRIBUTION  OF  WEALTH  chap. 

ployed,  the  average  return  for  all  would  be  less  than 
it  actually  is.  In  other  words,  diminishing  returns, 
when  referred  to  a  given  unit  or  dose  of  investment 
in  a  given  round  of  production,  are  not  actual  but 
theoretical  and  potential  They  are  always  described 
by  the  auxiliary  would.  They  are  a  product  of  the 
intellect,  and  are  conceived  only  by  comparing  the 
returns  in  one  round  of  production  where  a  given 
amount  of  capital  and  labour  is  invested,  with  another 
possible  or  prospective  round  having  a  larger  invest- 
ment. It  is  only  by  a  logical  device  that  the  different 
increments  invested  in  the  given  round  are  attributed 
with  different  amounts  of  the  total  product.  Yet  this 
logical  device  is  legitimate,  and  furnishes  the  only 
means  of  tracing  out  primary  causes.  It  is  only  by 
referring  to  what  would  have  been  or  what  miffht  have 
been  that  we  are  able  to  ascribe  different  effects  to 
different  units  in  actual  production.  This  is  simply  one 
way  in  which  theory  descends  beneath  the  phenom- 
ena of  practice,  and  by  means  of  analysis  searches 
out  primary  causes  and  relations.  The  so-called  op- 
position between  theory  and  practice  is  only  an  oppo- 
sition between  incorrect  theory  and  practice.  Theory 
rightly  viewed  is  an  explanation  of  practice,  or  at 
least  an  attempt  at  explanation. 

In  Diagram  VI.,  it  is  evident  that  the  marginal  in- 
vestment, instead  of  being  carried  out  to  a'b'  will  be 
carried  only  to,  say,  a'b",  where  the  value  of  the 
marginal  product  will  be  b"c",  and  the  value  of 
the   total   product  will   be   the  area  a'b"c"f'.     This 


DIMINISHLWG  RETURNS  AND  RENT 


151 


product  would,  then,  on  the  average  just  cover  the 
total  expenses,  a'b"c"'d'. 

The  distinction  here  noticed  may  be  better  illus- 
trated by  Diagram  VII.  This  diagram  represents  the 
average  returns  at  four  different  periods  or  rounds  of 
production,  to  investments  in  a  given  undertaking 
or  on  a  given  area  and  situation  of  ground,  measured 


Diagram    VII. 


^. 

\ 

c 

& 



C" 

e 

e' 

e" 

d 

d' 
d" 

d'" 


a  b  b'  b"         b'" 

in  terms  of  product  and  not  value.  In  the  first 
period,  investments  are  limited  at  the  point  b  and 
the  total  number  of  increments  invested  is  repre- 
sented by  ab.  The  expense  of  each  increment  is 
ad"\  and  the  total  expense  of  production  is  the 
area  abed'".  But  the  total  value  of  the  product 
is  the  area  abcd^  the  average  return  to  each 
increment  being  ad.  The  aggregate  profit  is,  there- 
fore, d"'ecd.    At  subsequent  rounds,  the  investments 


152  THE  DISTRIBUTION  OF  WEALTH  chav. 

are  carried  out  successively  to  5',  5",  h'" .  In  each 
round  the  expense  of  the  increments  remains  the  same, 
but  the  average  return  diminishes  to  ad\  ad",  ad'". 
Now,  supposing  the  first  period  to  represent  tlie 
actual  investment,  the  remaining  three  periods  will 
represent  the  possible  diminishing  returns  which 
would  follow  were  investments  carried  out  to  lower 
margins. 

If  we  return  now  to  the  actual  investment,  it  is 
plainly  a  question  of  convenience  whether  we  repre- 
sent the  total  return  to  the  increments  ah  by  the  area 
abed  or  by  the  area  abed'".  The  former  represents 
the  actual  state  of  the  matter  to  the  apprehension  of 
the  producer  himself,  since  actual  returns  are  pro- 
cured by  the  equally  efficient  co-operation  of  all  the 
increments  ab,  and  are,  therefore,  average  returns 
and  not  diminishing  returns.  But  the  area  abed'" 
gives  the  explanation  of  the  phenomena,  since  it 
shows  that  the  reason  why  average  returns  are  not 
as  high  as,  say,  ad}",  is  because  successive  increments 
yield  a  less  return  than  would  the  single  increment 
a,  if  it  were  the  only  one  invested.  In  other  words, 
the  conception  of  diminishing  returns  has  reference 
to  a  possible  set  of  circumstances  showing  what  would 
occur  under  other  conditions,  when  investments 
might  be  increased  or  diminished.  The  second  area 
—  abed"  —  shows  why  the  undertaker  ceases  to  invest 
when  he  reaches  the  point  b,  and  thus  reveals  the 
cardinal  importance  of  the  marginal  investments. 

If  now  we  return  to  the  illustration  of  diminishiner 


Ill  DIMINISHING  RETURNS  AND  RENT  153 

products  already  quoted  from  President  Walker,^  it 
will  be  noticed  that  the  same  line  of  reasoning  is 
employed  by  him,  and  that  average  product  per 
labourer  is  spoken  of  at  four  successive  rounds  of 
production.  In  the  first  round,  the  average  product 
for  ten  labourers  is  200  bushels,  then  it  becomes  for 
twelve  labourers  190  bushels,  for  fifteen  labourers  180 
bushels,  and,  finally,  for  twenty  labourers  160  bushels. 
But  the  aggregate  return  for  the  given  area  has  risen 
successively  from  2000  bushels  to  2280,  2700,  and  3200 
bushels.  Now,  in  order  to  illustrate  the  principle 
of  diminishing  returns,  we  should  fairly  express  the 
conditions  and  results  of  the  last  round  of  production 
where  twenty  labourers  are  employed  with  an  aggre- 
gate product  of  3200  bushels,  and  an  average  product 
of  160  bushels,  if  we  should  ascribe  to  the  first  ten 
labourers  a  product  of  200  bushels  each,  to  the  next 
two,  a  product  of  140  bushels  each,  to  the  next  three, 
140  bushels  each,  and  to  the  last  five,  100  bushels 
each.  This  is  not  the  actual  product  of  the  different 
labourers,  since  they  all  possess  equal  efiiciency ;  but 
from  an  analogy  with  what  they  icoidd  produce  under 
the  different  conditions  of  the  first  three  hypothetical 
rounds  of  production,  we  are  justified  in  dividing  up 
the  actual  aggregate  product  in  this  manner. 

So  far  for  diminishing  product  and  the  accepted 
theories.     Precisely  the  same  conditions  occur  in  di- 
minishing values.     Suppose  that  in  an  enterprise  of 
increasing  product,  ten  labourers  would  produce  100 
1  See  above,  p.  118. 
• 


154  THE   DISTRIBUTION   OF  WEALTH  chap. 

units  of  product,  twelve  labourers  130  units,  fifteen 
labourers  190  units,  and  twenty  labourers  250  units. 
Owing  to  changes  in  the  supply,  the  value  of  each 
unit  in  the  successive  rounds  is  |20,  1)18,  $14,  and 
$12,  making  the  successive  values  of  the  aggregate 
products  .$2000,  $2310,  $2660,  and  $3000.  The  aver- 
age share  of  the  labourers,  in  the  successive  rounds, 
would  be  $200,  $1781,  $1771  and  $150.  But,  sup- 
posing the  enterprise  to  be  a  monopoly,^  it  would  be 
a  fair  interpretation  of  the  productiveness  of  each 
labourer,  to  represent  the  first  ten  labourers  as  each 
producing  a  value  of  $220,  the  next  two  as  each  pro- 
ducing $170,  while  the  next  three  produce  $106|-  each, 
and  the  last  five  $68  each. 

We  conclude,  therefore,  that  all  the  arguments 
which  have  currently  been  employed  with  reference 
to  diminishing  product  apply  also  to  diminishing 
value,  and  that  the  law  of  diminishing  returns  is  uni- 
versal for  all  industries ;  that  the  difficulty  in  the 
way  of  extending  the  law  to  value  as  well  as  product 
has  arisen  from  the  failure  to  apprehend  that  the  laiv 
is  theoretical  and  poteiitial  rather  tlian  actual^  applying 
as  it  does  to  a  comparison  of  hypothetical  successive 
rounds  of  jjroduction  instead  of  to  successive  increments 
in  the  same  round  ;  and  that  its  main  usefulness  is  as 
a  logical  device  for  analysing  tendencies  rather  than 
co-existent  phenomena. 

The  principles  here  discussed  lead  to  an  important 
conclusion  regarding  the  law  of  diminishing  returns, 
namely,  — 

1  See  below,  p.  155. 


in  DIMIXISIIING  RETURNS  AND  RENT  155 

4.  The  law  of  diminishing  returns  obtains  its  true 
significance  only  where  capital  and  labour  are  em- 
ployed under  circumstances  of  partial  or  absolute 
monopoly.  It  would  apply  only  potentially  to  capital 
and  labour  were  the  conditions  of  their  employment 
subject  to  perfectly  free  competition.  There  would, 
of  course,  always  be  the  possibility  of  diminishing 
returns,  comparing  one  round  of  production  with  a 
possible  succeeding  one,  whether  the  enterprise  is 
competitive  or  monopolistic,  but  for  the  purposes  of 
analysis  and  illustration  by  diagram  within  the  limits 
of  a  single  round  the  law  can  have  significance  only 
in  the  case  of  monoply.  If  we  look  at  the  matter 
from  the  practical  standpoint,  it  is  only  because 
a  monopoly  is  possible  for  some  necessary  partner  of 
production  that  the  aggregate  increments  of  capital 
and  labour  invested  in  connection  with  this  monopoly 
element  show  a  higher  average  rate  of  product  (or 
value  of  j)roduct)  than  do  those  increments  which 
are  invested  under  wholly  competitive  circumstances. 
Were  competition  free,  production  would  always  be 
carried  out  to  the  point  where  the  total  product  would 
compensate  each  increment  of  capital  and  labour  (of 
equal  efficiency)  with  exactly  equal  values.  These 
values  would  come  down  to  the  expense  of  production 
and  there  would  be  left  no  surplus  above  expense  of  pro- 
duction. But  it  is  because  some  monopoly  element  has 
power  to  limit  production  before  the  point  is  reached 
where  average  value  equals  expense  that  the  value  of 
the  product  allows  a  surj^lus  above  its  expense.     Dia- 


156  THE  DISTRIBUTION  OF  WEALTH  chap. 

gram  VII.  again  will  illustrate  this  point.  The  only- 
reason  why  actual  investments  are  not  carried  beyond 
the  point  5,  is  because  there  is  a  monopoly  element 
which  gives  control  over  the  supply  of  the  product  to 
that  extent.  Were  there  no  monopoly,  plainly  it 
would  sufficiently  remunerate  the  capital  and  labour 
invested  to  carry  investments  out  to  the  point  h"\ 
because  up  to  that  point,  the  value  of  the  product  is 
just  large  enough  to  cover  the  actual  expense  of  each 
increment  of  capital  and  labour.  In  that  case  it 
would  be  fruitless  to  introduce  the  theoretical  expla- 
nation of  diminishing  returns  for  a  given  round  of 
production,  because  the  return  to  the  marginal  incre- 
ments would  then  appear  to  fall  below  the  expenses 
of  those  increments,  and  production  would  seem  to 
be  conducted  at  a  loss.  Production  normally  stops 
in  competitive  enterprises  at  the  point  where  an  added 
increment  of  capital  and  labour  would  not  bring  a 
sufficiently  increased  return,  which,  averaged  with  the 
earlier  returns,  would  cover  the  average  expense  of 
all  the  increments.  This  sets  the  limit,  in  compet- 
itive enterprises,  to  possible  diminishing  returns.  If 
business  were  freely  competitive,  and  there  were  no 
differential  advantages  whatever,  each  increment  of 
equal  efficiency  would  get  equal  shares  of  the  prod- 
uct; but  with  the  introduction  of  monopoly  elements, 
production  is  limited  at  the  point  of  highest  net  re- 
turns or  according  to  the  arbitrary  will  of  the  mon- 
opolist, and  the  earlier  increments  may  be  represented 
in  theory  and  by  diagrams  as  producing  a  more  valu- 


Ill  DIMINISHING  RETURNS  AND  RENT  157 

able  product  than  the  Later,  the  surplus  falling  to  the 
monopoly  elements. 

5.  The  law  of  diminishing  returns  is  the  basis  of 
the  law  of  rent  or  surplus  values.  If,  then,  the  law 
of  diminishing  returns  is  universal,  it  will  furnish  a 
principle  whereby  the  law  of  rent  can  be  extended 
to  other  elements  besides  land,  namely  the  monop- 
oly privileges  of  patents,  copyrights,  trade-marks, 
franchises  and  good-will.  To  do  this,  it  is  neces- 
sary to  take  the  third  standpoint,  that  of  a  single 
undertaking^.  Here  also  we  are  concerned  not  with 
product  alone  but  with  the  multiple  of  product  and 
value.  So  far  as  the  quantity  is  concerned,  returns 
in  all  industries,  viewed  from  this  third  standpoint, 
with  the  exceptions  noted  in  agriculture,  might  be 
forever  increasing ;  but  a  limit  to  profitable  produc- 
tion is  set  by  the  needs  of  the  market  at  some  point 
where  an  increasing  supply  will  cause  a  lowering  of 
the  value  per  unit  to  such  a  degree  that  the  value  of 
the  entire  product  begins  to  decline  relatively  to  the 
expense  of  production.  This  is  an  ever-present  limit 
to  increasing  returns,  and  is  applicable  to  all  indus- 
tries, viewed  from  the  third  standpoint.  This  is  true 
whether  the  single  enterprise  be  a  monopoly  or  simply 
one  of  many  competitors  in  the  production  of  a  given 
commodity.  If  it  be  a  monopoly,  the  third  standpoint 
agrees  with  the  second ;  and  the  law  of  diminishing 
returns,  as  already  explained,  with  reference  to  the 
second  standpoint,  here  also  holds  good.  If  the 
enterprise  is  competitive,  it  also  meets  the  point  of 


158  THE  DISTRIBUTION  OF  WEALTH  chap. 

diminishing  returns,  but  in  a  slightly  different  way. 
It  has  a  certain  range  of  customers,  who  purchase  a 
certain  quantity  of  its  commodity.  If  it  desires  them 
to  purchase  more,  or  if  it  desires  to  extend  its  market 
into  the  field  of  its  competitors,  it  can  do  so  only  by 
lowering  the  price,  and  this  lowering  can  continue 
until  the  prices  are  no  longer  remunerative. 

6.  Thus  in  taking  the  third  standpoint,  and  view- 
ing the  matter  from  the  side  of  value  or  distribution, 
we  discover  always  a  condition  of  diminishing  returns 
in  all  other  industries  as  well  as  agriculture.  The 
only  difference  to  be  noted  between  the  two  classes 
of  industries,  viewed  from  the  third  standpoint,  is  the 
relative  weight  of  the  two  elements  of  quantity  of 
product  and  value.  In  both  it  is  the  value  of  the 
total  product  which  increases,  then  diminishes.  In 
agriculture  this  total  value  is  determined  more  by 
variations  in  the  quantity  of  the  product  than  by 
those  in  the  value  per  unit,  though  the  latter  also 
plays  an  important  part.  In  other  industries  the 
product  may  show  always  increasing  returns,  but  the 
ultimate  decline  in  values  brings  about  diminishing 
returns  in  the  value  of  the  total  product. 

The  same  is  true,  as  has  already  been  indicated, 
when  we  compare  the  fourth  standpoint  with  the 
third.  In  the  fourth,  as  has  been  shown,  it  is  always 
the  product  which  diminishes  in  proportion  to  the 
increased  expenses  of  producing  it ;  but  when  we  con- 
sider that  product  is  produced  for  sale,  we  perceive 
that  the  significance  of  the  diminishing  return  lies  in 


Ill  DIMINISHING  RETURNS  AND   RENT  159 

the  value  of  the  product.  Here,  as  in  a  single  agri- 
cultural enterprise,  the  total  value  of  the  product 
from  a  given  area  relative  to  expenses,  is  determined 
more  by  variations  in  the  quantity  of  the  product 
than  by  those  in  the  value  per  unit. 

Henceforth,  in  speaking  of  increasing  and  dimin- 
ishing returns,  with  reference  to  the  third  and  fourth 
standpoints,  I  refer  to  the  multiple  of  product  and 
value.  This  will  give  a  universal  law  of  diminishing 
returns,  both  from  the  standpoint  of  area  of  ground, 
where  product,  primarily,  and,  therefore  value,  is 
subject  to  the  law,  and  from  the  standpoint  of  the 
single  undertaking,  where  value  primarily,  except  in 
agriculture,  is  subject  to  the  law. 

Section  II.  —  Tlie  Law  of  Reiit. 

We  are  now  able  to  make  a  valid  extension  of  the 
law  of  rent,  not  to  fixed  kinds  of  capital,  as  has  been 
attempted  by  recent  writers,  but  to  certain  social  and 
legal  relations  which  have  essentially  the  same  char- 
acteristics as  private  property  in  land.  We  have 
seen  that  a  piece  of  land  is  valuable  because  it  fur- 
nishes room  and  situation ;  that  is,  it  places  its  occu- 
pier in  such  relations  to  society  that  he  can  produce 
wealth  and  find  a  market  for  it ;  and  that  from  the 
physical  nature  of  the  land  itself,  and  from  the  nature 
of  private  property  in  land,  the  owner  is  able  to  limit 
its  supply  relatively  to  the  demand  of  society  for  it. 
Now,  there  are  other  legal  relations  which  give  their 
owners  similar  advantages.     They  are  the  monopoly 


160  THE  DISTRIBUTION  OF  IVEAITH  chap. 

privileges  wliicli  have  been  fully  described  in  Chapter 
II.,  such  as  public  franchises,  rights  of  way,  patent 
rights,  copyrights,  and  the  good-will  of  a  business. 
The  general  name  applicable  to  all  these  rights,  as 
well  as  to  the  right  of  property  in  land,  is  oppo7'tu- 
nities.  We  are  here  taking  the  standpoint  of  the 
individual  and  not»of  society.  Society  creates  these 
rights  through  law  and  assigns  them  to  individuals. 
They  are  valuable  to  the  individual  simply  because 
they  give  him  opportunity,  which  from  the  nature  of 
the  case  must  be  a  partial  or  total  monopoly,  to 
employ  labour  and  capital  in  the  creation  of  wealth, 
and  to  sell  this  wealth  to  society  at  large,  thus  sup- 
plying its  wants  and  receiving  in  return  the  com- 
modities and  services  which  society  is  producing. 
Their  value  to  the  individual  is  in  proportion  to  the 
net  amount  of  wealth  above  expenses  which  he  can 
thus  acquire.  In  this  fact  will  be  seen  later  the 
common  principle  of  surplus  value  which  character- 
ises all  these  monopolies. 

That  the  law  of  rent  is  capable  of  a  wider  exten- 
sion than  simply  to  landed  incomes,  and  that  not 
cost  of  production  but  earning  capacity  determines 
the  value  of  other  things  besides  land,  has  been  per- 
ceived by  various  writers.  But  the  mistake  is  made 
of  applying  this  law  to  capital  in  its  fixed  and  durable 
forms.-^ 

There  is  a  pi'actical  reason  why  this  extension 
should  not  be  made,  which  does  not  hold  in  the  case 
1  Clark,  Capital  and  its  Earnings. 


Ill  DIMINISHING  RETURNS  AND  RENT  161 

of  these  opportunities,  but  which  rather  suggests  the 
extension  of  rent  to  them.  The  problem  of  rent  has 
to  do  with  the  rehitions  between  landowners  on  the 
one  hand,  and  the  owners  of  capital  on  the  other. 
The  rent  of  land  has  peculiar  social  significance.  It 
is  a  share  of  the  social  income  which  goes  to  a  cer- 
tain class,  not  on  account  of  the  share  this  class  has 
had  in  producing  that  income,  but  on  account  of  the 
mere  ownership  of  the  conditions  for  its  production. 
This  is  the  case  also  with  the  other  social  and  legal 
relations.  Society  creates  these  relations,  and  not 
the  individual  producer.  He  merely  occupies  them 
as  he  does  land,  and  uses  them  for  the  production 
and  sale  of  his  commodities. 

There  are  also  scientific  reasons  against  this  exten- 
sion of  rent  to  capital,  growing  out  of  the  nature  of 
capital. 

1.  Capital  is  the  result  of  labour  and  savings.  It 
gives  no  monopoly  privilege,  since  it  can  be  produced 
at  will.  But  opportunities  are  not  the  result  of 
labour  and  savings.  They  are  social  and  legal  rela- 
tions.^ 

2.  Consequently,  the  prime  characteristic  of  capi- 
tal is  its  cost  of  production.  It  involves  abstinence 
and  risk.  But  we  cannot  speak  of  cost  of  produc- 
tion of  land  and  patent  rights  and  franchises.  They 
have  none.     They  constitute  elements  in  expense,  but 

1  True  the  ownership  of  capital  is  a  legal  relation  ;  but  in  this 
case  one  owns  the  object,  in  tlie  other  he  owns  the  relation  —  the 
res  iiicorporalis —  i.e.  the  monopoly  iDrivilege. 


162  THE  DISTRIBUITON   OF  WEALTH  chap. 

not  in  cost.  Capital  can  have  no  value  in  itself  unless 
it  is  properly  employed  in  connection  with  these  op- 
portunities. These  are  simply  social  relations,  i.e.  they 
furnish  access  to  a  body  of  purchasers.  Hence,  it  is 
they  which  create  the  demand  for  the  employment  of 
capital,  both  in  the  quantity  of  goods  demanded  and 
the  prices  offered.  The  extent  of  the  opportunity 
furnishes  the  measure  and  the  limit  for  the  amount 
of  capital  which  can  be  employed  before  the  marginal 
point  in  diminishing  returns  is  reached  where  returns 
barely  remunerate  costs. 

At  this  point  it  is  necessary  to  emphasise  again  the 
important  distinction  regarding  expense  and  cost. 
The  cost  of  producing  capital  is  the  abstinence  and 
risk  of  those  who  save  capital  for  productive  uses. 
But  there  is  also  an  expense  of  producing  capital. 
This  expense  consists  in  the  wages  paid  to  labourers, 
interest  paid  to  capitalists,  rents  and  monopoly  profits 
paid  to  the  landowners  and  monopolists,  and  the  neces- 
sary profits  paid  to  entrepreneurs.  The  saving  of  cap- 
ital in  these  daj^s  is  a  matter  of  exchange  as  much  as 
the  purchase  of  commodities  for  consumption.  The 
capitalist  saves  by  purchasing  directly  —  or  indirectly 
through  loans  to  borrowers  —  productive  instruments 
and  material,  which,  because  he  is  saving  his  capital, 
have  been  produced  for  him  (or  his  borrower)  as 
convenient  and  'productive  means  for  investing  his 
capital.  In  making  these  purchases  instead  of 
purchasing  commodities  for  enjoyment  he  enters 
upon  abstinence  and  risk,   and  the  capital  so   pur- 


Ill  DIMINISHING  RETURNS  AND  RENT  163 

chased  and  saved  represents,  from  his  standpoint, 
true  cost  of  production.  It  is  upon  the  amount 
which  he  thus  pays  out  that  he  expects  to  receive 
the  current  rate  of  interest.  He  therefore  receives 
interest  not  only  on  the  cost  of  production  on  the 
part  of  the  producers  of  the  capital,  but  also  on  their 
expenses  of  production.  For,  from  the  standpoint  of 
these  producers  from  whom  he  has  purchased,  this 
amount  represents  more  than  costs  —  it  includes  the 
monopoly  pajnnents  where  control  over  the  supply 
has  given  power  to  exact  payments  in  excess  of  cost. 
From  this  standpoint,  then,  we  must  speak  of  the 
expense  of  production  of  capital,  and  not  of  the  cost 
of  production.  But  since  cost  of  production  even 
from  the  standpoint  of  the  saving  capitalist,  is  so  in- 
definite a  notion,  we  shall  gain  in  definiteness  and 
yet  not  lose  the  essence  of  the  idea  of  cost  if  we 
steadily  look  at  the  matter  from  the  side  of  expenses. 
The  laws  which  govern  expenses  are  rigid  and  ascer- 
tainable.^ Expense  can  be  stated  in  figures,  and 
interest  and  profits  can  readily  be  calculated  upon  it. 
3.  If,  now,  capital  employed  in  connection  with 
the  opportunities  above  described  yields  a  surplus 
over  and  above  the  current  rate  of  profit  and 
interest  on  the  expense  of  production  of  the  capital 
itself,  this  surplus  should  l)e  credited  not  to  the 
capital  but  to  the  opportunity.  This  distinction 
is  not  merely  ideal,  it  is  also  practical;  for,  in  our 
day,  the  heaviest  machinery  can  be  so  quickly  repro- 
1  See  Chap.  IV. 


164  THE   DISTRIBUTION  OF  WEALTH  chap. 

duced,  that  even  when  fixed,  and  yielding  returns 
far  above  fair  profits  on  its  expense,  it  still  cannot 
command  a  value  above  this  expense.  Its  owners  ap- 
propriate this  surplus  value,  not  by  reason  of  their 
ownership  of  the  machinery,  but  by  their  ownership 
of  the  opportunity.  Consequently,  the  distinction 
between  fixed  and  circulating  capital  is  of  minor  sig- 
nificance. Fixed  capital  shades  off  into  circulating, 
and  its  most  durable  kinds  must  annually  be  repaired 
and  continually  renewed,  otherwise  they  rust  out 
in  a  few  years.  In  other  words,  fixed  capital  is  made 
up  from  daily  accretions  of  circulating  capital.  Both 
fixed  and  circulating  capital  derive  their  value  from 
their  productive  use,  i.e.  from  their  opportunities. 
And  if  the  opportunity  does  not  warrant  it,  this  an- 
nual repairing  just  mentioned  will  not  go  on,  and 
fixed  capital  will  be  allowed  to  waste  away. 

To  state  this  principle  in  another  form,  the  em- 
ployment of  capital  in  connection  with  these  oppor- 
tunities brings  to  the  entrepreneur  a  certain  yearly 
profit  over  and  above  the  yearly  expenses  of  the  enter- 
prise. Since  business  is  conducted  for  profit,  the 
value  of  his  undertaking  to  him  depends  upon  the 
amount  of  this  profit.  He  capitalises  (i.e.  estimates 
the  value  of)  his  entire  undertaking,  capital  and 
opportunity  together,  on  the  basis  of  this  annual 
profit,  compared  with  the  current  rate  of  profit  in 
other  undertakings.  How,  then,  shall  he  divide  this 
capitalised  value  between  his  capital  proper  and  his 
opportunity?     Shall  he  credit  the  capital  with  the 


Ill  DIMIXISHING  RETURNS  AND  RENT  165 

total  value,  or  the  opportunity?  The  answer  is, 
viewed  from  the  economist's  standpoint,  he  will 
credit  capital,  either  fixed  or  circulating,  only  with 
its  expense  of  production,  and  the  balance  will  be  the 
capitalised  value  of  his  opportunity.  The  reasons 
for  this  are  twofold.  First,  practical,  because  we 
want  to  know  what  part  monopolies  have  in  the  dis- 
tribution of  wealth.  Second,  scientific,  because  cap- 
ital, being  a  product  of  labour  and  savings,  is  created 
with  a  conscious  purpose,  and  with  the  expectation 
that  it  will  command  a  price  equal  to  its  expense  of 
production.  If  the  opportunity  is  wanting,  it  will 
not  be  created  at  all ;  or  if  the  opportunity  is  a  lim- 
ited one,  an  inferior  quality  or  amount  of  capital  will 
be  created  at  less  expense.  The  creation  of  capital  will 
not  extend  beyond  the  point  where  the  demand,  as 
represented  in  the  given  opportunity,  will  yield  the 
looked-for  profit.  This  profit,  with  reference  to  cap- 
ital, is  estimated  upon  the  exjiense  of  production  of 
the  capital,  which  must,  therefore,  have  a  capitalisa- 
tion (value)  equal  to  its  expense  of  production,  or  it 
will  not  be  produced.  And  it  cannot  have  a  value 
exceeding  this,  since,  then,  other  capital  of  like  kind 
will  be  produced  to  supply  the  same  wants,  and  com- 
petition will  bring  down  the  value  of  all  to  the 
expense  of  production. 

An  illustration  will  serve  to  make  plain  the  ar- 
gument. Suppose  a  transatlantic  steamship  com- 
pany, owning  a  steamer  purchased  at  an  expense 
of  $2,000,000,   is   able,    after   meeting    all   running 


166  THE  DISTRIBUTION  OF  WEALTH  chap. 

expenses,  to  declare  a  dividend  of  -f  200,000  annually. 
This  would  be  a  profit  of  10%  upon  the  expense 
of  their  capital.  Supposing  that  average  profits 
in  similar  undertakings  were  8%,  the  company 
would  consider  its  business,  including  its  steamer, 
as  worth  $2,500,000.  But  the  steamer  alone  would 
be  invoiced  at  only  its  expense  price,  $2,000,000, 
and  the  balance  of  the  capitalisation  —  $500,000  — 
would  be  attributed  to  whatever  monopoly  privilege 
the  company  may  have  possessed,  such  as  reputa- 
tion, business  connection,  good- will,  dock  and  wharf 
privileges,  patent  rights,  etc.  The  share  of  the 
capital  in  the  annual  profit  would  be  only  $160,000, 
and  the  share  of  the  monopoly  privilege  would  be 
$40,000. 

It  will  be  remembered  that  in  this  connection  I 
am  speaking  of  permanent  monopoly  opportunities, 
like  land,  franchises,  patent  rights,  and  good  will. 
Where  competition  is  perfectly  free,  and  new  com- 
peting capitals  can  be  introduced,  profits  are  lowered 
until  they  will  barely  remunerate  the  customary  profit 
on  the  expense  of  production  of  the  capital  itself; 
and  there  remains,  of  course,  no  surplus  which  can  be 
capitalised  and  stand  thus  for  the  value  of  the  oppor- 
tunity. The  effect  of  competition,  where  it  is  possible, 
is  to  reduce  profits  of  opportunities  to  nil ;  but  the 
normal  economic  activities  will  not  allow  profits  on 
capital  to  fall  below  the  customary  rate  on  the  expense 
of  production  of  the  capital  itself. 

I  am  not  denying  that  there  may  be  within   the 


Ill  DIMINISHING   RETURNS  AND   RENT  167 

bounds  of  capital  itself  certain  diiferential  advantages 
which  yield  an  income  analogous  to  rent.  One 
machine  may  be  more  efficient  than  another  producing 
the  same  product.  Its  wear  and  tear  may  be  less,  and 
it  may  displace  a  greater  amount  of  labour.  Its 
owner  could,  therefore,  reap  a  greater  profit  from  it ; 
and  if  its  cost  to  him  were  equal  to  that  of  the 
inferior  machine,  the  rate  of  profit  would  be 
greater — or,  what  is  the  same  thing,  he  would  obtain 
upon  the  machine,  besides  the  customary  rate  of 
profit  of  the  inferior  machine,  or  of  machinery  in  gen- 
eral, also  a  surplus  which  would  be  a  true  differential 
receipt  analogous  to  rent. 

But  this  difference  in  efficiency  between  pieces  of 
capital  is  very  different  from  the  difference  in  advan- 
tages which  the  owners  of  opportunities  enjoy. 

In  the  first  place,  they  are  usually  the  result  of 
individual  effort  and  inventive  genius,  and  the  differ- 
ential profits  they  give  are  rewards  to  personal  enter- 
prise ;  while  these  permanent  opportunities  are  legal 
and  social  creations  which  are  turned  over  to  individ- 
uals, and  which  afford  more  or  less  exclusive  rights 
of  selling  goods.  These  may  also  originally  have 
been  developed  by  individual  enterprise ;  but  when 
they  have  become  finally  fixed,  they  depend  for  their 
profits  upon  the  existence  of  society  at  large  and  a 
body  of  consumers. 

In  the  second  place  these  differences  in  capital 
are  only  temporary  and  transient  advantages.  But 
the  opportunities  in  question  are   not  only  perma- 


168  THE  DISTRIBUTION   OF  WEALTH  chap, 

nent  but  they  increase  in  value  as  population  in- 
creases and  brings  its  consequent  increase  in  demand 
for  the  product.  The  old  and  inferior  capital  rapidly 
wears  out,  and  when  new  machines  are  introduced 
they  are  patterned  after  the  ones  which  have  been 
enjoying  the  differential  advantages,  or  they  may 
even  be  improvements  upon  them.  Thus  these 
advantages  are  being  continually  reduced  to  nothing, 
and  machines  which  five  years  ago  had  advantages 
far  above  others  may  now,  on  account  of  new  inven- 
tions, be  good  only  for  old  iron.  Such  is  not  the 
case  with  fixed  opportunities,  except  to  a  limited 
extent  with  patent  rights,  copyrights,  and  the  good- 
will of  a  business.  Other  oj^portunities  are  fixed 
when  once  society  has  settled  down  permanently 
upon  a  given  territory,  and  if  they  change  in  their 
differential  advantages  at  all,  it  is  rather  to  increase 
than  to  diminish  them  as  population  and  demand 
increase. 

It  is,  then,  land  and  other  opportunities,  not  fixed 
capital,  to  which  the  law  of  rent  is  properly  ap- 
plied. These  opportunities,  as  well  as  land,  are  social 
and  legal  relations.  They  furnish  room  for  the 
economic  activities  of  man,  and  the  proper  environ- 
ment for  him  to  dispose  of  his  products  to  his  fellow- 
men.  Without  these  opi^ortunities  it  would  be  use- 
less to  engage  in  any  production  for  exchange,  but 
men  would  be  limited  to  satisfy  their  immediate 
needs  from  the  fruits  of  the  earth.  But  while 
they   furnish   room    and   a    market   for   production. 


Ill  DIMINISHING  RETURNS  AND  RENT  169 

these  opportunities  at  the  same  time  give  their 
owners  a  certain  power  to  limit  supply  and  to 
control  the  amount  of  production.  This  gives  them 
the  important  power  to  determine  the  lowest  limit  to 
which  marginal  production  shall  descend,  and  thus 
to  determine  the  expenses  of  production.  From  this 
fact  it  follows  that  the  law  of  diminishing  returns, 
being  a  law  of  value  as  well  as  of  product,  is 
applicable  both  to  land  and  these  opportunities, 
and  out  of  this  ajDplication  is  deduced,  in  one  case, 
the  law  of  rent,  in  the  other  a  law  of  monopoly 
profits  analogous  to  rent. 

The  law  of  rent  has  two  aspects,  an  extensive  and 
an  intensive.  The  extensive  has  reference  to  the 
outskirts  of  cultivation.  It  is  to  be  observed  only 
when  we  take  the  first  or  second  standpoint  with 
reference  to  the  law  of  diminishing  returns,  that  of 
an  entire  industr}-.  Its  border  line  is  called  the 
"  marofin  of  cultivation."  The  intensive  side  of  the 
law  relates  to  the  third  and  fourth  standpoints  ;  that 
is,  to  any  particular  enterprise  or  given  area  of  ground. 
Its  limit  is  that  point  where  the  undertaker  ceases 
to  invest  additional  capital  and  labour  in  his  enter- 
prise, and  may  be  called,  with  Professor  Patten, 
the  "  margin  of  utilisation."  ^  In  those  industries 
where  competition  is  perfect,  it  will  be  the  point 
where  the  return  to  the  last  increment  in  any  one 
enterprise  is  equal  to  the  return  to  the  last  increment 
in  any  other.     It  will  be  the  point  where  the  receipts 

1  See  Quarterly  Journal  of  Economics,  April,  1891,  p.  372. 


170  THE  DISTRIBUTION   OF   WEALTH      chap,  hi 

obtained  from  the  investment  of  the  last  increment 
of  capital  and  labour  are  equal  to  the  investment 
itself  plus  the  customary  profit  thereon.  The  char- 
acter of  the  industry,  and  the  more  or  less  favourable 
environment  which  it  occupies,  will  determine  how 
much  capital  and  labour  can  be  invested  before  this 
point  is  reached ;  but  in  all  such  industries  the  ten- 
dency will  be  to  invest  up  to  this  point.  In  the  case 
of  the  monopoly  elements  already  described  the 
margin  of  utilisation  is  determined  by  considerations 
leading  to  the  highest  net  returns.  But,  according 
to  the  law  of  diminishing  returns  as  already  described, 
it  will  be  seen  that  this  point  is  the  same  as  that  for 
competitive  enterprises,  namely,  the  point  where  the 
return  to  the  last  increment  is  equal  to  the  return  to 
the  last  increments  in  all  other  enterprises. 

The  intensive  side  of  the  law  of  diminishing  re- 
turns is  of  more  significance  than  the  extensive. 
Even  if  we  could  show  that  there  is  anywhere  no- 
rent  land  which  is  actually  cultivated,  such  land 
can  have  but  little  influence  on  the  values  of  land 
thousands  of  miles  away,  because  the  conditions  of 
capital  and  labour  are  so  different.  This  point  will 
appear  as  we  proceed  in  the  discussion  of  profits. 


CHAPTER   IV 

DIMINISHING   RETURNS   AND   DISTRIBUTION 

References  :  The  order  of  treatment  adopted  in  this  chaj^ter, 
and  the  conception  of  the  essential  nature  of  profits  agrees  nearly 
with  the  lucid  work  of  Gross,  Die  Lehre  vom  Unternehmergewinn, 
Leipzig,  1884.  Other  suggestive  writers  on  this  topic  are  Wieser, 
Z>e?'  Naturlidie  Werth,  Vienna,  1889 ;  Marshall,  Principles  oj 
Economics,  London  and  New  York,  1890  ;  Walker,  Political  Econ- 
omy, New  York,  1888  ;  Clark,  Capital  and  Its  Earnings,  Anierican 
Economic  Association,  1889  ;  Clark,  Philusophij  of  Wealth,  Boston, 
188G ;  Patten,  The  Theory  of  Dynamic  Economics,  Philadelphia, 
1892  ;  George,  Progress  and  Poverty,  New  York,  1879 ;  Gunton, 
Wealth  and  Progress, 'NevfYov^,  1887  ;  Mataja,  Unternehmergewinn, 
Vienna,  1884 ;  Wirminghaus,  Das  Unternehmen,  der  Unterneh- 
mergeioinn,  und  die  Betheilung  der  Arbeiter  am  Unternehmerge- 
winn, Jena,  1886 ;  Schroeder,  Das  Unternehmen  nnd  der 
Unternehmergevnnn,  vom  historischen,  theoretischen,  nnd  practis- 
chen  Standpunkte,  Vienna,  1884.  Articles  in  Quarterly  Journal 
of  Economics,  by  Walker,  Patten,  Clark,  Giddings,  Bonar,  Haw- 
ley,  Webb,  and  others.  The  reader  is  referred  to  Chapter  I.  of  the 
present  essay,  where  the  conclusions  hereafter  reached,  regarding 
the  cost  of  capital  and  cost  of  labour,  have  been  anticipated  in  order 
to  fill  out  at  that  place  the  outline  of  the  theory  of  value  and  price. 

In  the  production  of  wealth  personal  abilities  are 
employed  in  two  radically  different  ways,  and  in 
the  distribution  of  wealth  they  receive  two  radically 
different  kinds  of  income.  The  labourer  deals 
directly  with  the  forces  and  materials  of  nature,  and 
produces  utilities  by  changing  the  places  of  things. 

171 


172  THE  DISTRIBUTION  OF  WEALTH  chap. 

The  entrepreneur  organises  the  labourers.  He  does 
not  deal  directly  with  nature,  but  with  society.  The 
labourer  takes  few  risks.  He  is  conservative.  He 
works  along  accustomed  and  approved  lines.  The 
entrepreneur  is  the  speculating,  progressive,  organis- 
ing, inventive,  economising  agent  of  industry.  He 
undertakes  the  management  and  assumes  the  risks 
of  business.  He  is  the  pioneer  of  industry.  He 
marshals  and  controls  all  the  other  factors.  He  looks 
out  for  opportunities  for  profitable  investments,  and 
then  enlists  capital,  labour,  and  land  in  the  supply- 
ing of  human  wants.  He  contracts  with  the  repre- 
sentatives of  the  other  elements  for  their  services 
at  a  stipulated  price,  and  then  he  takes  the  risk  of 
obtaining  for  their  united  efforts  a  surplus  of  value 
above  his  stipulated  payments.  Thus  labour  receives 
a  stipulated  payment,  —  wages,  —  and  the  entrepre- 
neur receives  a  contingent  surplus, — -profits.  Profits 
are  not  proportional  to  the  amount  of  capital  em- 
ployed, nor  to  the  amount  of  labour  employed ;  they 
depend  upon  the  ability  and  good  fortune  of  the 
entrepreneur  in  discovering  and  utilising  favourable 
opportunities. 

The  entrepreneur  is  peculiarly  the  creature  of  a 
stage  of  industry  where  production  is  carried  on,  not 
for  the  immediate  use  of  the  producers,  but  for 
sale  and  profit.  He  is  the  middleman  between  pro- 
ducers and  consumers.  He  organises  the  producers 
and  purchases  their  combined  product,  and  then  sells 
this  product  for  what  he  can  get  for  it.     Thus  his 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    173 

profits  are  simply  the  difference  between  his  expenses 
and  his  receipts.  He  is,  therefore,  the  "residual 
claimant"  in  any  single  undertaking  or  round  of 
production. 

For  this  reason  we  gain  the  important  advantage 
of  simplicity  in  investigating  the  problems  of  dis- 
tribution, if  we  take  the  standpoint  of  the  entrepre- 
neur. We  can  refer  all  other  partners  to  him  as  a 
single  starting-point,  and  so  we  avoid  the  danger 
of  doubling  on  our  tracks. 

To  the  entrepreneur  the  other  factors  of  production 
appear  as  expenses.  It  is  out  of  his  receipts  that  he 
expects  to  pay  them.  His  receipts  are  the  value  of  his 
product,  and  this  is  subject  to  the  law  of  diminishing 
returns.  Hence,  he  cannot  extend  his  expenditures 
indefinitely.  He  must  limit  his  investments  at  the 
point  of  profitable  expenditure  ;  that  is,  the  point  be- 
yond which  returns  would  be  less  than  expenses.  The 
extent  of  his  investments  depends  upon  the  oppor- 
tunity which  he  holds.  This  is  true  whether  we  take 
the  third  standpoint  of  diminishing  returns,  that  of  a 
single  undertaking,  or  the  fourth,  that  of  a  given  area 
of  ground. 

But  not  only  are  expenditures  limited  by  profitable 
receipts,  the  successful  undertaker  also  distributes 
his  expenditures  among  the  different  factors  of  pro- 
duction in  such  a  way  that  equal  marginal  invest- 
ments in  different  factors  will  bring  equal  marginal 
returns.  In  this  way  he  gets  the  highest  net  returns 
from  his  combined  expenditures.     This   adjustment 


174  THE   DISTRIBUTION   OF   WEALTH  chap. 

of  the  different  factors  depends  upon  the  prices  and 
efficiency  of  each.  It  can  be  developed  only  through 
experience. 

Each  factor  in  production,  therefore,  having  its 
own  costs  and  efficiency,  may  be  looked  upon  as  con- 
tributing its  own  share  to  the  total  product,  and  this 
share,  like  the  total  product  itself,  is  subject  to 
diminishing  returns. 

Having  determined  in  general  the  law  governing 
receipts,  and  the  relations  between  receipts  and  ex- 
penditures, we  are  now  prepared  to  study  in  more 
detail  the  expenses  on  account  of  the  different  factors 
which  the  undertaker  must  employ  in  production. 
These  may  be  conveniently  stated  as  expense  of  la- 
bour, expense  of  capital,  necessary  profits,  permanent 
monopoly  profits  (including  rent),  transportation, 
taxes. 

1.  The  expense  of  labour  is  composed  of  two  factors, 
efficiency  and  wages.  When  wages  are  high,  if  effi- 
ciency be  also  high,  the  expense  of  labour  may  be 
low ;  and  low  wages  with  lower  efficiency  is  very 
expensive  labour.  For  the  sake  of  simplicity  in  the 
following  argument  I  assume  that  efficiency  is  con- 
stant for  all  the  labourers  of  a  given  grade  or  class. 

There  are  two  apparently  opposing  views  regard- 
ing the  causes  which  determine  the  rate  of  wages. 
First  is  the  position  that  the  wages  of  all  like  labour- 
ers are  determined  by  what  that  labourer  can  produce 
who  works  on  the  margin  of  cultivation,  or  the  mar- 
gin of  utilisation,  that  is  the  labourer  who  works  on 


IV      DIMINISHING  RETURNS  AND  DISTRIBUTION    175 

no-rent  ^  land  or  with  no-rent  capital.^  This  labourer 
receives  as  wages  his  total  product.  If  other  labour- 
ers received  more  than  he,  they  would  leave  the  mar- 
gin to  compete  with  them,  and  the  margin  would  rise 
to  the  labourer  next  above  him  in  point  of  land  and 
capital.  If  he  received  more  than  the  other  labourers, 
then  they  would  go  out  to  the  margin  to  compete 
with  him.  Consequently,  the  equalising  tendency 
of  wages  brings  them  all  down  to  the  level  of  the 
marginal  labourer,  who  works  upon  the  poorest 
opportunities,  and  consequently  pays  neither  rent 
nor  interest. 

The  other  view  maintains  that  wages  are  deter- 
mined by  the  standard  of  life  of  the  labourer.  As 
stated  by  Gunton,  "  The  chief  determining  influence 
in  the  general  rate  of  wages  in  any  country,  class,  or 
industry  is  the  standard  of  living  of  the  most  expen- 
sive families  furnishing  a  necessary  part  of  the  sup- 
ply of  labour  in  that  country,  class,  or  industry."  ^ 

Both  of  these  views  are  correct.  They  are  simply 
the  objective  and  subjective  sides  respectively  of  the 
law  of  wages.  They  are  the  two  sides  of  the  action 
and  reaction  between  the  individual  and  his  environ- 
ment. The  relative  influence  of  the  two  elements 
varies  with  different  classes  of  labourers.  With  the 
higher  classes  the  subjective  side  is  more  powerful 
than  the  objective,  but  with  the  weaker  and  lower 

1  See  George,  Progress  and  Poverty. 

2  Clark,  Capital  and  its  Earnings. 
8  Wealth  and  Progress,  p.  89. 


176  THE  DISTRIBUTION  OF   WEALTH  chap. 

classes  the  objective  side  is  the  more  powerful,  and 
they  are  the  slaves  of  their  surroundings. 

That  the  standard  of  living  seems  to  deter- 
mine wages  is  supported  by  several  important  facts. 
The  help  of  the  wife  and  children  as  wage-earners 
does  not  permanently  increase  the  family  income,  but 
tends  to  lower  it  through  lowering  the  standard. 
An  increase  in  the  length  of  the  working  day  does 
not  increase  wages,  neither  does  a  shortening  of  the 
day  lower  wages  ;  because  with  a  long  work  day  the 
standard  is  lowered,  and  with  a  short  work  day 
the  standard  is  raised.  The  experience  of  England 
demonstrates  that  poor  relief  tends  to  lower  wages 
by  the  amount  of  the  relief. 

On  the  other  hand,  there  are  the  well-known  facts 
which  labourers  realise  intensely,  whether  other  peo- 
ple do  or  not :  that  when  two  bosses  are  hunting  one 
man,  wages  go  up,  and  when  two  men  are  hunting 
one  boss  wages  go  down.  "  Bosses "  can  employ 
labourers  only  when  productive  opportunities  are 
open  to  them.  Hence,  wages  are  higher  in  new 
countries  where  land  is  free,  and  opportunities  for 
investment  and  self-employment  are  abundant.  And 
as  population  increases,  as  better  opportunities  are 
occupied,  and  as  the  margin  of  cultivation  is  lowered, 
wages  are  depressed.  These  facts  are  amply 
demonstrated  in  the  now  classical  work  of  Henry 
George. 

Rightly  viewed,  these  two  theories  of  wages  are 
not  contradictory,  but  complementary.     The  product 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    177 

of  labour  in  all  enterprises,  like  the  product  of  the 
other  factors  of  production,  is  subject  to  the  law  of 
diminishing  returns.  The  larger  the  supply,  the 
lower  will  be  the  value  of  the  marginal  product  com- 
pared with  the  labour  of  producing  it.  Hence,  what- 
ever controls  the  supply  of  labour  of  a  given  class 
controls  the  marginal  value  of  its  product,  and 
thereby  the  wages  of  the  producers.  The  rate  of 
wages  is  not  determined  by  the  cost  of  living,  unless 
cost  of  living  gives  control  over  supply,  and  alone  it 
cannot  do  this.  It  may  be  an  important  element  in 
aiding  other  factors,  but  of  itself  it  cannot  effect 
so  momentous  a  result.  Tlie  factors  which  enable 
labourers  to  control  the  supply  of  labour,  relatively  to 
demand,  have  been  already  outlined  in  our  discussion 
of  personal  rights.  We  may  here  summarise  that 
investigation  by  mentioning  the  following  factors :  — 

(1)  Labour  Unions.  —  The  very  raison  d'etre  of  a 
labour  union  organised  for  the  purpose  of  keeping  up 
wages  is  the  restriction  of  numbers.  This  is  accom- 
plished by  limiting  the  number  of  apprentices  who 
are  permitted  to  learn  the  trade,  and  by  i-efusing 
employment  to  non-union  men. 

(2)  Education,  knowledge  of  trade  secrets,  ac- 
quired skill  and  extraordinary  original  abilities  are 
all  eclectic  agents,  which  pick  out  a  few  from  the 
great  mass  of  workers,  and  set  them  in  positions  where 
they  can  supply  the  highest  wants  and  the  wealthiest 
patrons.  The  fact  that  in  most  instances  wages  are 
proportioned  to  efficiency  is  brought  about  only  by 


178  THE  DISTRIBUTION  OF  WEALTH  chap. 

the  fact  that  efficiency,  demand  being  given,  limits 
the  supply  somewhat  in  proportion  to  the  efficiency. 
Where  efficiency  does  not  have  this  effect  wages  are 
low,  as  in  the  case  of  the  educated  classes  of 
Germany,  and  women  wage-earners  everywhere. 

(3)  Restrictions  on  the  immigration  of  a  low  and 
cheap  class  of  labourers  enables  those  on  the  ground 
to  maintain  a  monopoly  of  their  services. 

(4)  Co-operating  with  these  factors  is  a  high  stand- 
ard of  living,  which  effects  its  results  b}^  late  mar- 
riages and  small  families.  In  all  cases  where  a  high 
standard  of  living  is  supposed  to  keep  up  wages  it 
will  be  found  that  some  of  these  other  causes  are  also 
present. 

On  the  other  hand,  the  factors  which  tend  to  in- 
crease the  supply  of  labourers  and  lower  wages  are 
the  opposite  of  those  just  mentioned.  They  are  found 
in  the  unorganised,  unskilled,  incapable  labourers,  and 
those  of  a  low  standard.  With  these  classes  objective 
causes  are  more  powerful  than  subjective.  The  envi- 
ronment presses  upon  them  and  they  cannot  resist  it. 
But  individuals  and  classes  of  strong  wills  and  ambi- 
tious aims  contrive  means  to  rise  above  their  sur- 
roundings. The  Anglo-Saxon  race  has  maintained  a 
high  standard  of  living,  because  it  has  been  a  pioneer 
race,  seeking  and  developing  new  and  rich  opportu- 
nities for  the  production  of  wealth,  relieving  the 
pressure  for  employment  at  home,  and  thus  raising 
the  marginal  utility  of  labour. 

It  is  undoubtedly  true  that  the  standard  of  living 


IV     DLVIXISH/A'G  KEl'URNS  AND  DISTRIBUTION    179 

of  the  most  expensive  labourers  of  a  given  class  cor- 
responds with  the  income  of  that  class ;  and  if  the 
standard  be  looked  upon  as  the  cost  of  production  of 
that  class,  we  might  say  with  Gunton  that  wages  are 
determined  by  the  cost  of  living  of  the  most  expensive 
part  of  the  labourers  of  that  class.  But  this  would 
be  accepting  a  post  hoc  for  a  'propter  lioc,  and  would 
be  setting  up  one  of  many  causes  for  the  only  cause. 

In  the  case  of  unorganised,  freely  competing  labour- 
ers, wages  may  be  forced  down  to  the  very  lowest 
cost  of  living.  As  a  matter  of  fact,  it  goes  below 
decent  cost,  such  as  prisoners  and  paupers  receive. 
But  this  descent  must  stop  before  the  point  is  touched 
where  the  worker's  abilities  are  wholly  destroyed,  or 
he  himself  is  sent  to  the  poorhouse  or  prison. 

The  action  and  reaction  of  these  two  sets  of 
conditions  in  determining  wages  are  visible  in  the 
economies  of  every  entrepreneur  and  every  industry. 
Plainly  the  labourers  of  a  class  or  community  cannot 
permanently  receive  more  wages  than  the  marginal 
labourer  receives;  but,  on  the  other  hand,  the 
complaint  is  often  made  that  the  resources  of  a 
country  like  our  West  or  like  the  continent  of 
Australia  cannot  be  developed  because  wages  are  too 
high,  as  though  resources  were  of  more  importance 
than  men.  This  statement,  however,  illustrates  the 
other  side  of  the  law  of  wages,  namely,  that  the  loca- 
tion of  the  margin,  whether  high  or  low,  depends  upon 
whether  wages  are  high  or  low.  The  entrepi'eneur 
employs  different  grades  of   labourers,  and  disposes 


180  THE  DISTRIBUTION  OF  WEALTH  chap. 

them  in  the  order  which  will  bring  him  the  highest 
net  return  for  the  wages  he  pays  them.  He  takes 
into  consideration  their  differences  in  efficiency,  the 
differences  in  wages,  and  the  character  and  extent 
of  his  enterprise.  If  wages  fall  through  a  lowering 
of  the  standard  (efficiency  being  given),  the  farmer 
can  employ  a  larger  number  of  labourers,  can  extend 
his  production  by  cultivating  poorer  soils  or  by  more 
intensive  cultivation  of  his  original  soil ;  the  manu- 
facturer and  merchant  can  increase  the  quantity  of 
their  output  to  such  an  extent  that  prices  will  fall 
and  lower  margins  be  reached.  If  the  standard  of 
life  rises  (efficiency  not  increasing),  the  undertakers 
must  withdraw  from  their  former  margins,  or  else 
make  up  their  losses  by  improvements  in  organisation 
or  machinery,  or  by  increasing  relatively  the  quantity 
of  capital. 

Equally  true  is  it,  that  when  labourers  of  any  class 
increase  in  numbers,  the  newcomers  must  betake 
themselves  to  lower  margins.  This  means  that  wages 
are  lowered  and  consequently  the  standard  of  life 
must  be  lowered,  and  with  this  the  standard  of  all 
the  labourers  of  the  same  class. 

In  this  same  way  can  we  explain  differences  of 
wages  respecting  localities  and  classes.  In  an  old 
and  densely  populated  community,  or  in  large  cities, 
opportunities  have  been  occupied,  low  margins  have 
been  reached,  the  standard  of  life  has  been  lowered, 
and  common  unorganised  labourers  get  very  low 
wages.     But  in  the  same  communities  will  be  found 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    181 

higher  classes  of  labourers  getting  high  wages  and 
enjoying  a  high  standard.  The  numbers  of  these 
classes  have  been  limited  either  through  their  labour 
organisations,  through  restrictions  on  marriages,  or 
through  obstacles  in  the  way  of  acquiring  their  skill 
and  ability.  Consequently  the}^  cannot  be  employed 
by  undertakers  in  such  large  numbers,  or  on  such  low 
margins,  as  can  the  common  labourers.  Yet  they  are 
employed  up  to  the  limit  Avhere  the  product  they 
create  is  equal  to  the  wages  they  receive  (including 
profits  thereon),  and  this  constitutes  their  margin. 
Thus  there  are  different  marginH  for  different  labour- 
ers, corresjjondinf/  to  different  standards  of  life,  as 
well  as  different  margins  for  the  same  class  in  different 
localities. 

Cost  of  living  cannot  be  looked  upon  as  the  sole 
cause  or  determinant  of  wages.  In  stating  the  law 
of  wages,  it  should  be  borne  in  mind  that  there  is  no 
necessary  supply  of  labour  since  there  is  no  necessary 
demand,  but  tliat  the  extent  of  the  demand  for  labour 
depends  upon  its  price.  Wages,  then,  of  a  given  class 
of  labourers  are  determined  by  the  cost  of  living  of  the 
most  expensive  part  of  the  customary  supply  of  labour- 
er's of  that  class,  this  supply  being  itself  determined  by 
the  power  ivhich  the  given  class  possesses  of  limiting  its 
numbers  relatively  to  the  possible  demand.  WJiere 
there  is  7io  power  to  limit  numbers  the  laiv  of  diminish- 
ing returns  presses  wages  doivn  to  the  minimum  of  life. 
Consequently  the  expense  of  labour,  efficiency  being 
given  coincides  ivith  the  cost  of  living  of  the  marginal 
labourers  of  the  given  class. 


182  THE   DISTRIBUTION  OF  WEALTH  chap. 

The  law  of  wages  holds  true  regarding  salaries. 
Salaries  differ  from  wages  mainly  in  the  closer  per- 
sonal relations  existing  between  the  salaried  employes 
and  the  employers,  and  in  the  incidental  advantages 
accompanying  them. 

2.  Expeyise  of  Capital.  —  There  are  two  kinds  of 
capital  involved  in  production,  working  or  active 
capital,  and  material  or  passive  capital.^ 

The  raw  material  of  production  is  entirely  used  up, 
and  its  total  cost,  including  interest  thereon,  must 
therefore  be  reckoned  as  expense,  and  must  be 
covered  out  of  the  receipts  of  business. 

The  expense  of  working,  or  active  capital,  depends 
on  three  elements,  efficiency,  depreciation,  and  in- 
terest. 

By  efficiency  of  capital  is  meant  the  same  thing  as 
by  efficiency  of  labour.  Some  kinds  of  soil  are  more 
fertile  than  others,  and  will  produce  greater  quan- 
tities of  product  or  better  qualities.  Some  machines 
having  the  same  cost  as  others  are  nevertheless  more 
productive,  both  in  the  quantity  and  the  quality  of 
the  product.  Efficiency  is  always  compared  with  the 
cost  of  the  machine  and  the  expenses  of  operating 
it. 

By  depreciation  is  meant  simply  the  wear  and  tear 
and  using-up  of  fixed  capital.  It  is  really  a  deduc- 
tion from  efficiency.  The  tendency  of  progress  is  to 
increase  efficiency  and  reduce  depreciation,  and  thus 
doubly  to  increase  net  efficiency.  Depreciation,  like 
1  See  Clark,  Capital  and  its  Earnings. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    183 

the  expenses  for  material,  must  be  entirely  met  by 
the  receipts  from  sales. 

Interest  on  the  capital  invested  in  business,  whether 
owned  or  borrowed,  is  a  part  of  the  expense  of  pro- 
duction which  must  be  met  by  the  entrepreneur.  Our 
present  purpose  is  to  determine  the  causes  which  con- 
trol the  rate  of  interest;  but  in  order  to  do  so  we 
must  briefly  inquire  into  the  nature  of  interest. 

Interest  is  to  be  viewed  from  two  sides :  first,  from 
that  of  the  entrepreneur  who  employs  capital  in  pro- 
ductive enterprises ;  and  second,  from  that  of  the 
owner  of  capital  who  saves  it  for  investment.  To 
the  entrepreneur,  capital  is  valuable  because  it  pro- 
duces more  goods  at  the  same  expense,  or  the  same 
goods  at  less  expense,  than  could  be  produced  without 
it.  Capital  does  not  produce  values^  it  produces  goods. 
It  does  this  by  virtue  of  the  forces  and  energies  inher- 
ent in  it.  These  give  off  "  material  services  "  ^  which 
supply  the  wants  of  men.  These  services  may  be 
given  directly  to  men,  as  the  shelter  of  a  house,  or 
may  be  given  indirectly  in  the  form  of  some  material 
product,  as  bread  or  clothes.  These  are  the  uses  of 
capital.  Thus  the  use  and  productivity  of  capital 
are  one  and  the  same  thing.  It  is  for  this  that  the 
entrepreneur  makes  payment.  He  expects  to  obtain 
for  these  material  services  a  greater  sum  than  he 
pays.  It  is  his  business,  then,  to  look  out  for  the 
value  of  these  services.  He  must  see  to  it  that  goods 
are  not  produced  in  so  great  abundance  as  to  have 
1  Bohm-Baweik. 


184  THE  DISTRIBUTION  OF  WEALTH  chap. 

no  value,  or  to  have  a  value  below  their  cost  of  pro- 
duction. 

From  the  side  of  the  owner  or  lender  of  capital, 
interest  is  a  payment  for  abstinence  and  risk.  There 
is  a  subjective  and  an  objective  side  to  the  law  of  in- 
terest just  as  there  is  to  the  law  of  wages.  The 
objective  side  is  that  of  the  entrepreneur  who  em- 
ploys capital  and  of  the  industrial  environment, 
where  are  found  opportunities  for  the  employment  of 
capital  in  the  production  of  valuable  goods.  The 
subjective  side  is  that  of  the  owner  of  capital,  just  as 
the  subjective  side  of  the  law  of  wages  is  that  of  the 
owner  of  labour  power.  It  is  the  action  and  reaction 
of  these  two  sets  of  forces  and  conditions  which  de- 
termine the  rate  of  interest.  Abstinence  and  risk 
determine  the  minimum  below  which  the  rate  of  in- 
terest cannot  fall,  because  capitalists  will  not  save 
their  capital  for  investment  at  a  lower  rate.  Absti- 
nence is  painful ;  it  is  the  postponement  of  possible 
present  gratifications.  It  is  self-sacrifice.  It  is  the 
true  cost  of  production  of  capital.  It  depends  upon 
the  intensity  of  the  pleasures  which  the  savers  of 
capital  forego,  the  amount  of  risk  which  they  assume, 
and  the  length  of  time  they  have  to  wait.  The  rela- 
tions between  risk  and  abstinence  are  very  close. 
Were  it  not  that  people  save  for  other  than  mere 
egoistic  reasons,  almost  the  whole  of  abstinence  might 
be  looked  upon  as  risk.  There  is  the  risk  of  not 
living  to  enjoy  the  fruits  of  present  sacrifice,  and  also 
the  risk  of  losing  partly   or  AvhoUy  one's  savings. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    185 

Risk  greatly  increases  the  rate  of  interest  which  must 
l)e  paid,  at  least  doubling  it,  as  compared  with  absti- 
nence, and  often  increasing  it  five-,  ten-,  and  twenty- 
fold. 

But  we  are  not  to  assume  that  all  capital  which  is 
saved  is  the  result  of  abstinence  and  risk,  and  that, 
therefore,  interest  is  always  a  reward  of  abstinence. 
As  has  been  pointed  out  in  Chapter  I.,^  a  large  amount 
of  capital  is  saved  which  represents  no  sacrifice  what- 
ever. It  is  simply  a  reinvestment  of  surplus  profits 
which  have  been  acquired  through  no  effort,  and 
whose  expenditure  for  present  consumption  would 
give  no  pleasure.  But  there  is  a  limit  to  this  capac- 
ity for  saving  for  every  individual,  even  the  richest. 
Sacrifice  gradually  emerges  as  the  quantity  saved 
increases.  The  capitalist  begins  to  weigh  those  pos- 
sible present  pleasures  which  he  postpones  against 
those  future  payments  of  interest  which  he  expects 
to  receive.  And  when  he  ceases  to  save  additional 
increments  of  his  income,  the  marginal  savings  repre- 
sent a  subjective  cost  which  to  him  is  equal  to  the 
rate  of  interest.  On  the  increments  which  are  saved 
before  the  marginal  increments,  the  rate  exceeds  in 
his  estimation  the  cost  of  the  saving,  and  yields, 
therefore,  a  true  surplus. 

On  the  objective  side,  the  productivity  of  capital, 
it  is  the  opportunity  for  investment  which  determines 
the  amount  of  the  product  and  the  maximum  of 
interest.     In  all  cases  this  is  subject  to  the  law  of 

1  pp.  18,  19. 


186  THE  DISTRIBUTION  OF  WEALTH  chap. 

diminishing  returns.  The  maximum  interest  which 
the  entrepreneur  can  pay,  efficiency  being  given,  is 
the  product  of  the  capital  employed  on  the  margin 
of  production.  Maximum  and  minimum,  in  free 
competition,  tend  to  coincide ;  for  the  entrepreneur, 
employing  capital  at  the  rate  of  interest  current  in 
the  community,  will  extend  his  production  in  the 
line  of  diminishing  returns  out  to  that  "margin  where 
the  returns  to  capital  will  just  pay  the  contract 
interest.  If  interest  is  low  he  can  employ  more 
capital  and  thus  produce  goods  at  lower  margins.  If 
interest  is  high,  he  must  withdraw  from  his  least 
profitable  investments,  and  the  margin  is  thereby 
raised.  If  capital  seeking  employment  is  abundant, 
and  if  the  power  of  foreseeing  the  future  is  strong 
and  risks  are  light,  caj)ital  will  force  itself  into  lower 
margins  whose  ]-eturns  are  less,  and,  consequently, 
must  accept  lower  rates  of  interest.  The  two  causes, 
objective  and  subjective  to  the  owner  of  capital,  oper- 
ate in  the  same  way  as  with  the  owner  of  labour. 

In  Diagram  VIII.  let  he  represent  the  entire  in- 
come of  a  capitalist,  say  f  1,000,000  per  annum.  The 
curve  adfx^  measured  from  5c,  represents  the  amount 
of  sacrifice  which  he  will  experience  in  saving  succes- 
sive increments  of  his  income.  He  has  a  sufficiently 
powerful  vision  into  the  future  to  feel  severe  pain 
if  he  should  consume  his  entire  income  in  present 
enjoyment,  so  that  the  line  ad^  measured  below  the 
base  line,  represents  actual  })leasure  in  saving  the 
amount  of  capital  hd.    But,  from  the  point  (/,  additional 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    1S7 

increments  begin  to  infringe  upon  his  desire  for  pres- 
ent enjoyments,  and  true  abstinence  appears.  Should 
he  save  his  entire  income,  the  line  of  abstinence  for 
the  last  increment  would  take  the  direction  x^  and  the 
amount  of  abstinence  would  be  infinite.  The  rate  of 
interest  for  a  given  period  of  time,  is  measured  by  the 
line  gf.     The  amount  of  capital  which  this  capitalist 

Diagram   VIII. 


will  save  is  then  measured  by  hg^  and  the  last  incre- 
ment saved,  yields  a  return  in  future  pleasures,  i.e. 
interest,  which  exactly  balances  the  subjective 
estimate  of  present  pleasures  postponed.  The 
capitalist  has  gained  an  unearned  surplus  above  the 
cost  of  saving  on  all  the  previous  increments,  and 
this  total  surplus  is  measured  by  the  area  adfk. 


188  THE  DISTRIBUTION  OF  WEALTH  chap. 

The  same  diagram  may  represent  the  savings  and 
abstinence  of  an  entire  community.  Wealthy  indi- 
viduals, and  those  of  vivid  foresight,  experience  little 
or  no  sacrifice  in  abstinence ;  but  there  is  a  margin 
of  moderately  circumstanced  individuals,  and  those 
who  have  a  keen  sense  of  present  joys,  who  must  be 
induced  to  save,  in  order  that  there  may  be  sufficient 
capital  for  the  needs  of  production.  These  are  in 
the  region  gg\  There  are  also  a  number  of  persons 
whose  present  wants  are  so  intense,  and  whose  in- 
comes are  so  meagre,  that  they  cannot  save  under 
any  circumstances.  They  are  in  the  region  g^c. 
Now,  as  long  as  the  line  of  abstinence  of  the  com- 
munity takes  the  direction  adfx^  the  line  of  dimin- 
ishing returns,  which  takes  the  direction  ey,  will 
intersect  at/,  and  there  will  be  only  hg  capital  saved 
and  invested.  But  if  the  power  of  saving  capital 
is  increased  through  greater  foresight,  lighter  risks, 
and  larger  incomes,  the  line  of  abstinence  may  take 
the  direction  adf'x\  the  point  of  intersection  of  dimin- 
ishing returns  would  be  /',  and  the  rate  of  interest 

9'f- 

From  what  precedes  we  are  able  to  say  that  the 

rate  of  interest  is  determined  hy  the  amount  of  product 

obtained  from  increments  invested  on   the    margiii  of 

production^  and  the  lowest  point  to  tvhich  the  margin 

can   fall    is    determined    hy    the     subjective    forces^ 

abstinence  arid  risk,  which  limit  the  saving  of  capital. 

Consequently    the    expense    of  capital,    efficiency    and 

depreciation  being  given,  coincides  ivith  the    marginal 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    189 

cost  of  production  of  capital^  and  the  rate  of  hit  ere  st  is 
determined  not  by  past  investments  of  capital  hut  by 
investments  of  new  capital  from  fresh  savings  or  netv 
margins. 

Since  now  it  is  the  supply  of  disposable  capital 
Y/liich  determines  the  rate  for  all  capital,  the  im- 
portant question  arises,  What  shall  be  the  rate  on 
old  investments  ? 

In  the  first  place,  it  is  to  be  noted  that  the  entre- 
preneur does  not  calculate  interest  upon  the  amount 
of  his  turnover  during  the  year,  but  upon  what  he 
calls  his  capital.!  This  is  expressed  not  in  machines 
and  materials  and  finished  goods,  but  in  values.  It 
is  strictly  capitalisation  instead  of  capital.  It  in- 
cludes the  values  of  all  his  fixed  capital,  and  also 
an  amount  which  stands  for  his  turnover — that  is, 
for  investments  in  wages,  material,  and  all  current 
expenses.  This  amount  is  invested  over  and  over 
again  during  the  year.  Through  the  system  of 
credit  and  banking  and  short  loans,  sales  are  antici- 
pated, and  these  running  expenses  are  met  out  of 
product.  Out  of  the  difference  between  those  ex- 
penses and  sales,  the  entrepreneur  expects  to  earn 
interest  and  profits  on  his  capitalisation. 

There  is  considerable  difference  among  different 
industries  regarding  the  ratio  between  turnover  and 
capital  invested.     In  manufactures  and  retailing  the 

1  By  turnover  is  meant  all  those  expenses  which  are  met  out  of 
sales  during  the  progress  of  a  given  ijroduction  period,  usually 
one  year. 


190  THE   DISTRIBUTION  OF  WEALTH  chap. 

turnover  may  be  two  to  ten  times  the  capital  in- 
vested. But  in  agriculture,  the  investments,  on  the 
whole,  are  made  but  once  a  year,  and  the  entire  capi- 
tal, therefore,  coincides  with  the  entire  turnover 
during  the  year. 

The  rate  of  interest  being  now  determined  by  the 
current  rate  on  new  capital  in  the  community,  the 
rate  on  old  investments  is  affected  differently,  accord- 
ing as  the  particular  enterprise  is  thoroughly  com- 
petitive or  monopolistic.  The  simplest  case  is  that 
of  a  monopoly.  But  here  there  are  two  alternatives. 
Suppose  the  current  normal  rate  of  interest  falls,  but 
the  aggregate  net  returns  on  capitalisation  of  the 
particular  enterprise  remain  the  same.  Then  this 
aggregate  return  will  be  capitalised  at  the  lower  rate 
of  interest,  and  the  capitalisation  of  the  enterprise 
will  be  increased.  Here  the  alternatives  appear. 
Either  this  new  capitalisation  may  be  attributed  to 
the  capital,  which  would  then  show  a  higher  value 
but  a  lower  rate  of  interest ;  or  the  capital  proper 
would  be  attributed  only  with  its  original  value,  and  a 
smaller  aggregate  of  interest  would,  in  consequence 
of  the  lower  rate,  be  allotted  to  it,  and  the  surplus 
would  be  allotted  to  the  monopoly  privilege.  From 
a  scientific  point  of  view,  as  already  shown  in  Chapter 
III.,  the  latter  is  the  true  method  of  analysis ;  but  in 
the  popular  mind  and  business  circles,  the  former 
is  usually  implicitly  accepted. 

Where  the  business  is  competitive,  the  entrepreneur 
endeavors  to  keep  the  amount  of  his  original  capi- 


IV     DIMINISHhYG  RETURNS  AND  DISTRIBUTION    191 

talisation  unimpaired.  He  calculates  interest  upon 
this  and  determines  thereby  his  profit  or  loss.  But 
prices  of  his  product  will  be  forced  down,  so  that  he 
can  earn  no  more  than  the  current  rate  on  this  origi- 
nal capitalisation.  If  his  business  falls  below  this 
earning  capacity,  there  can  come  about  a  new  capi- 
talisation at  a  lower  figure  only  through  bankruptcy, 
when  the  original  investment  is  wholly  w^iped  out, 
and  business  begins  again  in  proportion  to  the  new 
opportunities. 

3.  Necessary  Profits.  —  There  is  much  confusion 
in  nearly  all  the  discussions  of  profits  through  the 
failure  to  notice  that  there  are  three  different  kinds 
of  profits.  One  kind  alone  is  considered  by  Smith, 
Ricardo,  and  Mill,  when  they  speak  of  the  tendency  of 
profits  to  equality  and  a  minimum.  Another  kind  is 
in  the  mind  of  President  Walker  when  he  develops 
his  rent-theory  of  entrepreneur's  profits.  And  the 
third  kind,  though  it  has  not  escaped  notice,  has  failed 
to  find  au}^  place  in  the  systematic  theories  of 
distribution. 

These  three  kinds  of  profits  are  necessary  profits 
(Smith  and  others),  personal  or  temporary  profits 
(Walker),  and  permanent  or  monopol}^  profits.  To 
these  there  should  be  added,  as  a  fourth  species  of  in- 
come for  the  entrepreneur,  his  fair  wages  of  superin- 
tendence. 

In  speaking  of  profits  in  the  early  part  of  this 
chapter,  as  a  contingent  surplus  depending  on  the 
difference  between  expenses  and  receipts,  the  kinds 


192  THE  DISTRIBUTION  OF  WEALTH  chap. 

referred  to  were  personal  and  permanent  profits. 
Necessary  profits  are  not  a  contingent  surplus,  but  a 
part  of  the  true  costs  of  production,  just  as  much  as 
wages  and  interest.  They  bear  a  fairly  constant  rela- 
tion to  the  current  rate  of  interest,  and,  in  speaking 
of  necessary  profits,  we  may  usually,  for  the  sake  of 
convenience,  include  interest  proper ;  though  to  be 
strictly  in  harmony  with  the  analysis  of  expenses  here 
made,  we  should  make  this  category  independent  of 
and  above  interest. 

Necessary  profits  is  a  compensation  mainly  for  risk 
and  trouble  of  management.  We  have  already  seen 
that  risk  is  a  weighty  element  in  determining  the  rate 
of  interest  which  must  be  paid.  But  the  risk  assumed 
by  the  lender  of  capital  is  in  no  way  equal  to  that 
assumed  by  the  entrepreneur.  The  latter  is  never  a 
mere  manager;  he  is  always  a  property-owner.  He 
may  not  own  capital  proper,  but  at  least  he  owns  the 
opportunities  for  its  employment.  The  stockholders 
of  a  railway  company  are  the  entrepreneurs  owning 
the  franchise  and  rights  of  way,  but  usually  rail- 
roads are  built  from  borrowed  funds.  The  entre- 
preneur, then,  not  only  takes  the  risk  of  his  own 
capital,  but  all  of  his  capital  and  property  must  be 
pledged  as  security  for  the  capital  he  borrows.  Thus 
he  is  the  buffer  for  the  protection  of  labour  and  capi- 
tal against  risks.  If  risk  is  an  element  of  cost  in 
upholding  the  rate  of  interest,  the  risk  of  the  entre- 
preneur must  be  a  still  greater  cost  in  upholding  the 
rate  of  necessary  profits. 


IV      DIMIXISHING  RETURNS  AND  DISTRIBUTION    193 

If  we  estimate  this  necessary  profit  at  double  the 
current  rate  of  interest  {i.e.  including  interest  itself), 
we  shall  hit  upon  a  figure  which  is  amply  warranted 
by  the  general  business  experience  of  the  world  at 
large,  at  least  of  small  industries.  Adam  Smith 
called  attention  in  his  time  to  this  connection  between 
"  the  lowest  ordinary  rate  of  profit "  and  the  rate  of 
interest.  "  The  proportion,"  he  says,^  "  which  the 
usual  market  rate  of  interest  ought  to  bear  to  the 
ordinary  rate  of  clear  profit,  necessarily  varies  as 
profit  rises  or  falls.  Double  interest  is  in  Great 
Britain  reckoned  what  the  merchants  call  a  good, 
moderate,  reasonable  profit ;  terms  which  I  apprehend 
mean  no  more  than  a  common  or  usual  profit.  In 
a  country  where  the  oi'dinary  rate  of  clear  profit  is 
8  %  or  10  %,  it  may  be  reasonable  that  one-half 
of  it  should  go  to  interest,  wherever  business  is 
carried  on  with  borrowed  money.  The  stock  is  at 
the  risk  of  the  borrower,  who,  as  it  were,  insures  it 
to  the  lender ;  and  4  %  or  5  %  may,  in  the  greater 
part  of  trades,  be  both  a  sufficient  profit  upon 
the  risk  of  his  insurance,  and  a  sufficient  recompense 
for  the  trouble  of  employing  the  stock.  But  the  pro- 
portion between  interest  and  clear  profit  might  not 
be  the  same  in  countries  where  the  ordinary  rate  of 
profit  was  either  a  great  deal  lower  or  a  great  deal 
higher.  If  it  were  a  good  deal  lower,  one  half  of  it, 
perhaps,  could  not  be  afforded  for  interest ;  and  more 
might  be  afforded  if  it  were  a  good  deal  higher." 
1  Wealth  of  Nations,  Bk.  I.,  Chap.  IX. 


194  THE  DISTRIBUTION  OF  WEALTH  chap. 

The  difference  in  the  proportion  between  the  rates 
of  interest  and  profit,  I  take  it,  depends  not  so  much 
on  whether  rates  are  high  or  low  as  whether  the  in- 
dustries are  large  or  small.  A  large  business  can  be 
conducted  on  closer  margins,  and  the  necessary 
profits  in  the  way  of  risks  and  trouble  of  manage- 
ment, though  they  may  be  large  in  the  aggregate, 
may  yet  be  small  in  proportion  to  the  capital  em- 
ployed and  the  interest  on  that  capital.  It  is  pretty 
safe  to  say  that  no  matter  how  the  current  rate  of 
interest  varies  in  different  parts  of  the  country,  the 
very  facts  which  cause  this  rate  to  vary  will  cause 
the  rate  of  necessary  profits  to  vary  in  much  the  same 
proportion.  Where  risks  assumed  by  owners  of  capi- 
tal are  great  and  interest  is  consequently  high,  there 
the  risks  of  entrepreneurs  will  be  great  and  necessary 
profits  will  also  be  high.  Consequently,  necessary 
profits,  in  average  undertakings  will  be  double  the 
current  rate  of  interest,  whatever  this  may  be. 

Necessary  profits  are  closely  allied  to  personal 
profits,  already  mentioned,  the  difference  being  mainly 
one  of  degree.  This  line  may  be  said  to  be  some- 
what arbitrarily  drawn.  Its  justification,  however,  is 
discovered,  not  in  looking  backward  over  an  enter- 
prise already  established,  but  in  looking  forward  to 
the  inauguration  of  a  new  enterprise  or  the  extension 
of  an  old  one.  If  in  this  forward  outlook  there  is  no 
promise  of  personal  profits  the  enterprise  miglit  still 
be  undertaken ;  but  if  customary  necessary  profits 
seem    not   assured   the   venture    will    not   be    made. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    195 

This  is  the  crucial  point  in  questions  of  cost,  since 
it  is  marginal  investments  which  determine  the  lowest 
limit  of  supply  and  therefore  of  costs,  and  marginal 
investments  are  new  investments.  They  are  on  the 
line  where  freedom  of  choice  is  possible,  and  there- 
fore will  not  be  made  unless  the  prospects  are  good 
for  what  the  entrepreneur  considers  necessary  profits. 
Personal  profits  are  contingent  surpluses  above  neces- 
sary profits,  originating,  as  described  later,  in  the 
progress  of  an  enterprise  already  established.  It  is 
with  personal  profits  that  loss  is  to  be  contrasted, 
since  personal  profits  are  a  surplus  added  to  necessary 
profits,  and  loss  is  a  decrement  deducted  from  neces- 
sary profits. 

It  is  to  be  noticed  that  just  as  interest  is  calculated 
upon  the  capital  (capitalisation)  of  a  business,  so 
necessary  profits  are  calculated  upon  the  same 
amount. 

It  is  a  difficult  matter,  and  perhaps  in  all  cases  not 
necessary,  to  separate  wages  of  superintendence  from 
necessary  profits.  By  wages  of  superintendence  is 
meant  a  fair  salary  for  the  entrepreneur,  such  as  a 
man  of  his  abilities  could  earn  in  a  subordinate  posi- 
tion. Wages  of  superintendence  is  largely  a  meta- 
phorical term,  because  wages  proper  are  a  stipulated 
income,  determined  by  agreement  between  employer 
and  emplo3^ed.  But  the  term  embodies  a  truthful 
idea,  namely,  that  the  undertaker  rightly  considers 
his  own  wages,  or  the  wages  he  could  earn  in  any 
other  position,  as  a  part  of  his  expenses.     He  must 


196  THE  DISTRIBUTION   OF  WEALTH  chap. 

make  a  living  for  himself  and  his  family  out  of  his 
business,  and  must  sustain  the  standard  of  living 
which  is  characteristic  of  his  class.  And  all  this  is  a 
necessary  part  of  the  expenses  of  his  business.  It  is 
plain  that,  while  necessary  profits,  depending  largely 
on  risk,  vary  in  proportion  to  capital  invested,  wages 
of  superintendence  do  not  necessarily  vary  in  the 
same  proportion.  Furthermore,  the  separation  is 
practically  made  in  the  case  of  joint-stock  companies, 
where  the  actual  managers  are  paid  regular  salaries, 
and  the  stockholders,  the  true  entrepreneurs,  receive 
no  wages  of  superintendence,  but  only  profits. 

4.  Perynaneyit  Monopoly  Profits  and  Rent. — Of  the 
two  kinds  of  contingent  profits,  personal  or  tempo- 
rary profits  do  not  enter  into  the  expenses  of  pro- 
duction, and  will,  therefore,  be  taken  up  later  in  the 
discussion,  when  treating  of  the  relations  between 
expenses  and  receipts.^  Permanent  j^rofits  and  rent 
enter  into  the  expenses  of  production  in  a  peculiar 
way,  and  their  treatment  with  reference  to  expenses 
can  be  better  managed  after  we  have  developed  more 
fully  the  nature  of  the  income  itself.^ 

5.  Transportation  charges  are  an  important  element 
in  the  expenses  of  production.  It  is  differences  in 
transportation  charges  which  determine,  more  than 
anything  else,  the  differential  advantages  of  the 
permanent  monopoly,  land. 

6.  Taxes.,  viewed  from  the  standpoint  of  society, 
are  not  a  part  of  the  expenses  of  production,  but  the 

1  See  pp.  198,  230  ff.  2  See  pp.  199,  229  ff. 


n-     DIMINISHING  RETURNS  AND  DISTRIBUTION    197 

share  which  society  takes  in  the  finished  product. 
Yet  the  individual  undertaker  must  estimate  them  as 
a  part  of  liis  expenses,  —  his  profits  are  a  surplus  con- 
tingent upon  taxes  as  well  as  upon  other  expenses. 
Taxes  appear  in  ordinary  statistics  of  products  to 
account  for  verj'  little  of  the  expenses.  The  reason  is 
that  oidy  direct  taxes  on  the  business  itself  are  con- 
sidered. There  are  also  indirect  taxes  on  the  con- 
sumption of  labourers  which  increase  their  costs  of 
living,  and  show  themselves  in  higher  wages,  espe- 
cially for  the  better  class  of  workmen. 

Summing  up  this  discussion  of  expenses  and 
receipts,  we  get  the  following  results:  Profits  are 
the  difference  between  expenses  and  gross  receipts. 
Expenses,  measured  with  reference  to  the  amount  of 
product,  tend  to  diminish  in  some  industries  with 
increase  in  the  quantity  produced ;  in  others  expenses 
are  constant,  and  in  still  others  increasing.  Yet  in 
all  industries  the  point  is  reached  where  values 
decrease  in  a  ratio  greater  than  any  decrease  in 
expenses,  and  then  the  stage  of  decrease  for  profits 
is  entered  upon.  This  stage  continues  in  competi- 
tive industries,  until  the  point  is  reached  of  equal 
returns  to  marginal  investments.  At  that  point 
production  normally  ceases.  In  monopolistic  indus- 
tries production  is  curtailed  at  the  point  of  highest 
net  returns,  taking  into  account  the  average  product 
of  the  enterprise  as  a  whole.  By  a  theoretical  expla- 
nation the  marginal  returns  here  are  also  held  to  be 
equal  to  the  returns  on  marginal  investments  else- 
where. 


198  THE  DISTRIBUTION  OF  WEALTH  chap. 

We  are  now  prepared  to  notice  more  in  detail  the 
distinction  between  personal  and  permanent  profits.^ 
Personal  or  temporary  profits  are  due  to  fluctuations 
in  prices,  fortunate  coincidences,  and  to  the  ability 
of  the  entrepreneur.  Such  profits  disappear  with  the 
return  of  prices  to  a  normal  level,  the  disappearance 
of  the  fortunate  circumstances,  and  the  death  or 
retirement  of  the  entrepreneur.  They  are  principally 
due  to  the  personal  abilities  of  the  entrepreneur,  and 
might  best  be  called  personal  entrepreneur  profits. 
Since  this  income  is  not  a  permanent  one,  depending 
upon  fixed  and  certain  social  opportunities  for  the 
sale  of  products,  it  cannot  be  capitalised  and  disposed 
of  by  the  entrepreneur  to  other  parties  ;  it  follows 
the  person  of  the  entrepreneur  himself. 

Permanent  profits  are  such  as  arise  out  of  the 
monopoly  privileges  which  have  been  described 
in  Chapter  II.  They  depend  upon  the  nature  of 
the  business  (natural  monopolies,  trusts),  the  pos- 
session of  natural  resources  or  opportunities  (land), 
the  possession  of  legal  advantages  (patents,  fran- 
chises, copyrights),  long-established  relations  to  the 
communit}^,  inspiring  confidence  and  popularity 
(good- will).  These  advantages  consist  in  the  fact 
that  they  enable  the  monopolist  to  limit  the  supply 
of  his  product  relatively  to  the  demand,  and  at  the 
same  time  either  to  sell  a  larger  quantity  of  his 
product  than  he  could  do  without  them,  or  to  sell 
at  higher  prices,    or   both.      Permanent   profits    can 

1  See  the  suggestive  discussion  by  Gross,  Unternehmergewinn. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    199 

be  safely  estimated  in  advance.  They  are  such 
that  the  entrepreneur  can  make  contracts  based 
upon  them  either  in  borrowing  money,  in  agreeing 
to  pay  rents  and  royalties,  or  in  purchasing  a  busi- 
ness. Permanent  profits  are  absorbed  by  any  mo- 
nopoly which  is  concerned  in  the  production  and 
sale  of  goods.  If  profits  are  temporary  and  not 
capable  of  previous  estimation,  they  fall  directly 
to  the  entrepreneur  as  such.  He  also  bears  any 
temporary  losses.  But  if  profits  are  permanent,  the 
entrepreneur,  for  the  sake  of  occupying  the  especially 
favorable  opportunity  involved,  can  afford  to  pay  for 
the  privilege  in  proportion  to  the  increase  of  revenue 
he  expects  therefrom.  The  owners  of  the  monopo- 
listic element  can  demand  and  obtain  a  share  of 
these  permanent  profits,  because  the  entrepreneur,  in 
possessing  the  monopoly,  is  at  just  so  much  advantage 
over  his  competitors.  But  he  cannot  permanently 
retain  such  advantages,  because  if  he  is  not  paying 
for  the  monopoly  the  entire  difference  in  profits 
between  what  others  get  without  it  and  what  he  gets 
with  it,  they  will  bid  against  him  the  next  time  the 
opportunity  is  put  up  for  sale  or  lease,  and  he  will  be 
compelled  to  pay  over  to  the  owner  of  the  monopoly 
its  full  value  as  evidenced  by  its  permanent  profits. 
He  cannot  complain  of  this,  because  he  is  still  left  on 
a  level  with  his  fellow  entrepreneurs.  His  profits 
are,  however,  no  longer  of  the  permanent  variety, 
but  personal.  They  depend  on  his  own  abilities  as 
an  organiser  and  manager,  or  upon  the  unforeseen 


200  THE  DISTRIBUTION   OF  WEALTH  chap. 

turns  of  the  market.  They  are  the  changing  surplus 
above  expenses  of  production  and  permanent  profits 
of  monopoly.  Permanent  profits  now  become  a  part 
of  his  expenses,  but  over  and  above  them  there  still 
remains  a  margin  where,  by  the  display  of  extra  abili- 
ties, he  can  secure  true  personal  profits. 

These  principles  will  be  still  further  brought  out 
and  illustrated  in  a  discussion  of  such  monopolies  as 
land,  franchises,  patents,  good-will,  etc. 

I.  Land  may  be  either  a  partial  or  an  absolute 
monopoly.  An  absolute  monopoly  is  the  ownership 
of  all  the  natural  sources  of  a  given  kind  of  raw 
material.  It  is  stated  that  there  is  but  one  nickel 
mine  in  the  United  States  :  the  ownership  of  such  a 
natural  opportunity  would  be  an  absolute  monopoly. 
Investments  will  stop  at  the  point  of  the  highest  net 
returns.  Each  increment  of  investment  represents 
expenses,  and  the  surplus  of  receipts  for  each  incre- 
ment is  permanent  profits.  This  is  absorbed  by  the 
owner  of  the  absolute  monopoly. 

Such  a  monopoly  will  illustrate  the  steady  transi- 
tion from  temporary  to  permanent  profits.  When  it 
is  first  opened  up  it  has  no  value.  The  entrepreneur 
enters  as  a  speculator  willing  to  invest  his  capital 
and  labour,  and  to  take  the  risks  of  securing  a  surplus 
of  receipts.  But  the  mine  turns  out  to  be  wonder- 
fully rich  and  easily  worked.  Profits  are  enormous. 
So  long  as  the  original  contract  with  the  owner  lasts, 
profits  fall  to  the  entrepreneur.  At  the  expiration 
of   the  original  contract  a  new  one  is  to   be  made. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    201 

The  owner  and  the  entrepreneur  perceive  that  these 
profits  promise  to  be  permanent.  Consequently  the 
new  contract  provides  for  a  much  higher  royalty  or 
rent  than  the  old  one.  Permanent  profits  are  thus 
transferred  from  the  entrepreneur  to  the  landowner ; 
and  yet  the  entrepreneur  must  remain  satisfied  be- 
cause he  is  still  in  possession  of  an  opportunity 
where  his  investments  Avill  yield  to  him  as  much  as 
they  would  in  any  other  enterprise. 

In  case  the  entrepreneur  is  also  the  owner  of  the 
monopoly,  it  is  a  more  difficult  matter  to  distinguish 
between  that  part  of  his  profits  which  belong  to  the 
permanent  monopoly  and  that  part  which  is  due  to 
his  own  managing  abilities.  Yet  the  difficulty  is  no 
greater  than  the  frequent  problem  which  arises  in 
case  the  entrepreneur  is  both  capitalist  and  labourer, 
in  determining  what  part  of  his  income  is  profit  and 
what  part  is  interest  and  wages.  The  conditions 
vary  with  the  ability  of  the  man  and  the  character  of 
the  permanent  monopoly.  If  the  business  is  such 
that  it  falls  away  and  declines  upon  the  death  of  the 
entrepreneur,  we  may  assert  that  the  monopoly  was 
a  temporary  and  personal  one,  though  it  may  have 
existed  throughout  a  long  lifetime.  But  if  the  busi- 
ness continues  just  as  prosperous  as  ever  through 
the  possession  of  some  permanent  differential  advan- 
tage, such  as  patents,  ground  sites,  franchises,  we 
may  conclude  that  the  entrepreneur  was  simply  the 
pioneer  in  developing  this  particular  permanent  mo- 
nopoly, and  that  the  profits  which  he  obtained  had 


202  THE  DISTRIBUTION  OF  WEALTH  chap. 

made  the    transition    during   his    lifetime    from    the 
temporary  to  the  permanent. 

The  partial  monopoly  in  land  is  far  more  common. 
Here  the  monoijoly  ahsorhs  only  the  permanent  profits 
of  the  least  prosperous  entrepreneur  who  actually 
sustains  himself  in  business  in  the  community.  He 
is  the  man  who  has  no  monopoly  vested  in  himself, 
no  especial  advantage  of  good-will,  etc.,  but  is  sub- 
ject to  the  full  play  of  competition.  He  is  the  mar- 
ginal undertaker.  He  pays  the  customary  wages  for 
labour,  the  usual  prices  for  capital  and  material,  and 
is  merely  able  to  make  interest  and  necessary  profits 
on  his  investments.  In  the  quotation  given  on  page 
193,  from  Adam  Smith,  the  "  good,  moderate,  reason- 
able profit "  and  the  common  and  usual  profit  corre- 
spond closely  with  or  perhaps  slightly  exceed  the 
profit  I  have  in  mind  when  speaking  of  the  least 
prosperous  entrepreneur,  the  man  who  is  just  able  to 
keep  permanently  in  business  in  the  community. 
According  to  the  saying  of  the  Frenchman,  that  10% 
of  the  men  who  go  into  business  succeed,  50%  "vege- 
tate," and  40%  fail,  he  belongs  to  the  50%  who 
"  vegetate."  He  must  have  his  necessary  profits,  or 
else  he  becomes  one  of  the  40%  who  fail,  some  other 
entrepreneur  takes  his  place,  and  he  is  forced  to  yield 
whatever  permanent  surplus  may  come  to  him  from 
his  business.  In  this  way  the  rent  of  land  is  deter- 
mined by  what  the  marginal  entrepreneur  pays. 
Land  furnishes  opportunity  for  the  production  and 
sale  of  goods.     If  he  is  not  using  the  land  up  to  the 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    203 

extent  of  the  opportunity  which  it  offers,  and  is, 
therefore,  unable  to  make  his  necessary  profit  on  his 
investments  and  also  on  the  permanent  surpluses  on 
the  increments  before  the  marginal  increment,  then 
others  who  can  use  the  land  to  the  full  extent  of  its 
opportunities  will  outbid  him.  Thus  he  will  be  left 
below  the  "  margin  of  enterprise "  ^  and  the  margin 
will  rise  to  the  point  occupied  by  the  next  entrepre- 
neur, who  will  now  be  the  marginal  one.  Neither 
will  rent  be  permanently  higher  than  this  least  pros- 
perous entrepreneur  can  afford  to  pay ;  because, 
when  he  fails  in  business  on  account  of  rents  higher 
than  the  opportunities  of  the  land  warrant,  there 
will  be  no  entrepreneur  better  than  himself  to  take 
the  land ;  if  one  should  do  so,  he  would  be  bar- 
gaining away  needlessly  a  portion  of  any  especial 
advantages  he  may  himself  possess,  such  as  patents, 
superior  business  abilities,  etc. 

The  marginal  entrepreneur  need  not  occupy  the 
poorest  land  of  its  kind  in  his  community  in  order 
that  the  rent  of  other  land  may  be  determined  by 
the  rent  of  his.  If  adjoining  land  is  better,  it  will 
pay  more  rent ;  if  poorer,  less  rent.  For,  if  an  en- 
trepreneur, doing  business  on  better  land,  does  not 
pay  more  rent,  the  marginal  entrepreneur  can  afford 
to  leave  his  own  site  and  bid  higher  for  the  better 
one  ;  and  if  poorer  land  pays  the  same  or  higher  rent 
than  he  does,  the  occupant  of  the  poorer  land  will 
either  go  out  of  business,  or  secure  a  lowering  of  his 
1  Patten,  Dynamic  Economics. 


204  THE  DISTRIBUTION  OF  WEALTH  chap. 

rent,  or  bid  against  the  marginal  entrepreneur  for 
his  site.  In  the  first  two  cases  it  is  plain  that  the 
rent  is  determined  by  what  is  paid  by  the  marginal 
entrepreneur.  In  the  last  case,  according  to  the 
assumption,  the  marginal  entrepreneur  is  unable  to 
pay  higher  rent.  Therefore  he  gives  up  his  position, 
goes  out  of  business,  the  margin  of  undertaking 
rises,  and  higher  rents  are  paid  throughout  the  com- 
munity. In  every  case  the  rent  of  all  land  is  graded 
high  or  low  with  reference  to  the  rent  paid  by  the 
marginal  entrepreneur. 

Thus  it  will  be  seen  that  the  average  business  and 
industrial  qualities  of  the  community  are  an  impor- 
tant element  in  determining  the  rent  of  land.  The 
degree  of  these  qualities  determines  what  grade  of 
entrepreneurs  shall  be  the  marginal  ones.  But  at 
the  same  time  none  of  the  undertakers  will  bid  so 
high  for  rents  as  to  swallow  up  any  especial  advan- 
tages one  may  possess,  as  patents,  good-will,  etc. 
They  all  estimate  their  own  business  prospects,  and 
the  rent  they  can  pay,  by  the  prospects  and  rent  of 
the  average  or  least  prosperous  of  their  fellow-under- 
takers. 

Rent  is  the  total  surplus  above  expenses  secured 
by  the  least  prosperous  entrepreneur  who  continues 
in  business.  It  is  the  surplus  product  on  each 
increment  of  capital  and  labour  invested  above  the 
return  obtained  on  the  marginal  increments.  We 
have  no  difficulty  in  seeing  the  immediate  factors 
upon  which  the  size  of  this  surplus  or  rent  depends. 


IV     DIMiyiSHING  RETURNS  AND  DISTRIBUTION    205 

They  are:  1.  The  number  of  increments  of  capital 
and  labour  invested  before  the  margin  of  utilisation 
is  reached.  2.  The  size  of  the  surpluses  obtained  on 
each  increment  before  the  marginal  increment  is 
reached. 

But  while  these  factors  determine  immediately  the 
amount  of  the  aggregate  surplus,  rent,  they  are  the 
secondary  and  not  the  ultimate  factors.  They  them- 
selves depend  on  two  primary  and  final  conditions : 
I.  The  extent  of  the  opportunities  afforded  by  the 
land  for  the  production  and  sale  of  goods.  II.  The 
expenses  of  the  factors  of  production,  labour,  capital, 
necessary  profits,  transportation,  taxes,  sales.  The  in- 
vestigation of  these  conditions  and  their  influence  on 
rent  will  require  careful  and  prolonged  attention. 

I.  The  extent  of  the  opportunities  afforded  by  the 
land  for  the  production  and  sale  of  goods  depends 
upon  the  height  and  range  of  the  diminishing  returns 
of  a  given  area  of  land  of  given  situation.  It  includes : 
A.  With  reference  to  production,  land  offers  oppor- 
tunities profitable  for  investments  of  labour  and  capi- 
tal in  proportion  to  the  quantity  of  goods  which  can 
be  produced  with  a  given  outlay  of  labour  and  capi- 
tal, e.r/.  the  greater  or  less  fertility  of  agricultural 
land,  access  to  natural  water-power,  etc.  B.  With 
reference  to  sales,  the  opportunities  of  land  have 
regard  to  (^A)  the  quantity  of  goods  which  can  be 
sold  and  (i?)  the  prices  which  can  be  obtained.  The 
quantity  which  can  be  sold  from  a  given  area  of 
land  depends  upon  the  situation  of  the  land  with 


206  THE  DISTRIBUTION  OF  WEALTH  chap. 

reference  to  large  populations  of  consumers;  the 
prices  to  be  obtained  depend  upon  («)  the  cost  of 
transporting  goods  to  these  consumers,  which  must 
be  met  before  net  prices  can  be  obtained  by  the  pro- 
ducer, and  (6)  the  character  and  wealth  of  the 
customers  who  are  in  the  habit  of  doing  their  trad- 
ing in  the  given  locality.  (Retail  stores.)  The 
significant  characteristic  of  opportunities  is  the  fact 
already  developed  of  universally  diminishing  returns, 
varying  widely,  however,  in  range  and  extent. 

II.  The  expense  of  the  factors  of  production,  labour, 
capital,  etc.,  varies  in  different  localities.  Where 
labour  and  capital  are  abundant,  and  the  standard  of 
living  of  labourers  is  low,  there  wages  and  interest 
will  be  low  :  and,  in  addition,  if  taxes  are  low  and 
facilities  of  transportation  convenient  and  cheap,  the 
expenses  of  production  will  be  relatively  low. 

Taking  these  two  primary  conditions  together,  we 
may  show  how  they  affect  the  gross  surplus  which 
goes  to  rent  by  the  way  in  which  they  affect  in  turn  the 
immediate  factors  upon  which  rent  depends,  namely, 
1,  the  number  of  increments  of  capital  and  labour 
which  can  be  invested  before  the  margin  of  utilisa- 
tion is  reached,  and  2,  the  size  of  the  surpluses  on 
each  of  these  increments. 

I.  The  amount  of  capital  and  labour  which  can  be 
profitably  invested  before  the  no-profit  increment  is 
reached  depends  upon, — 

1.  The  opportunities  afforded  by  the  land  for  the 
production  and   sale    of   goods,    as   above    analysed. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    1^1 

The  greater  the  number  of  increments  which  can  be 
invested  and  produce  a  surplus,  the  greater  the  total 
surplus.  In  Chapter  Wl}  I  have  shown  how  greatly 
land  varies  in  this  regard,  according  to  situation. 
Forest  and  pasture  land  occupy  the  lowest  position. 
They  are  on  or  near  the  margin  of  cultivation.  But 
little  capital  and  labour  can  be  profitably  invested 
there.  As  we  approach  the  centres  of  population, 
passing  through  arable  land,  market-gardening,  man- 
ufacturing and  residence  sites,  and  finally  retail  and 
commercial  sites,  land  becomes  more  and  more  fa- 
vourable for  the  profitable  investment  of  capital  and 
labour.  But  in  all  cases,  no  matter  where  the  land 
is  situated,  there  is  a  stage  of  diminishing  returns 
and  a  limit  beyond  which  it  is  no  longer  profitable  to 
invest  capital  and  labour.  This  is  the  margin  of 
utilisation.  Beyond  that  point  capital  will  flow  out 
to  other  fields  of  investment.  Hence  the  margin  of 
utilisation  in  commerce  and  exchange  corresponds 
with  that  in  adjoining  industries.  But  before  this 
point  is  reached  it  has  been  possible  to  apply  several 
millions  of  dollars  a  year  to  the  land  in  question, 
each  one  yielding  a  surplus  beyond  the  necessary 
return  to  the  investment  on  the  margin.  The  sur- 
plus from  each  increment,  as  determined  by  the 
investments  of  the  least  prosperous  undertaker,  goes 
to  the  owner  of  the  land,  as  in  other  industries. 

2.    The  total  amount  of  capital  and  labour  which 
can  be   profitably   invested  depends   also   upon   the 
1  See  pp.  139-144. 


20S  THE   DISTRIBUTION  OF  WEALTH  chap. 

expense  of  the  factors  of  production,  wages,  interest, 
taxes,  and  transportation.  If  these  are  low,  a  greater 
quantity  of  capital  and  labour  can  be  invested  in  the 
progress  of  diminishing  returns,  before  the  point  is 
reached  where  returns  are  equal  to  the  increments 
invested,  than  is  the  case  where  expenses  are  high. 
That  is,  where  expenses  of  capital  and  labour  are  low, 
efficiency  being  given,  production  can  be  profitably 
carried  out  to  lower  margins  of  utilisation. 

Adding  this  element  to  the  foregoing,  we  perceive 
that  greater  amounts  of  capital  and  labour  can  be 
invested  on  land  in  old  countries  than  in  new,  in 
cities  than  in  rural  districts ;  because  both  the  oppor- 
tunities for  sales  and  high  prices  are  better,  and  the 
expenses  of  capital,  labour,  transportation,  and  sales 
are  lower. 

II.  Each  increment  invested  before  the  marginal 
increment  yields  a  surplus.  We  have  next  to  deter- 
mine the  size  of  this  surplus  for  each  increment.  It 
depends,  like  the  other  secondary  factor,  on  the  two 
primary  factors. 

1.  The  productivity  of  the  land,  either  its  fertility, 
as  in  agriculture,  or  the  prices  that  can  be  obtained 
at  the  sale  of  products  owing  to  the  advantages  of 
situation. 

Although  all  lands  are  subject  to  increasing  and 
diminishing  returns,  yet  different  lands  present  wide 
differences  in  the  rate  of  increase  and  diminution  for 
given  amounts  of  capital  and  labour.  That  is,  the 
surpluses  on  the  earlier  increments  invested  on  one 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    209 

tract  may  be  much  larger  than  the  surpluses  on  the 
earlier  increments  on  another  tract,  though  on  both 
tracts  the  return  to  the  marginal  increments  is  ex- 
actly the  same. 

2.  The  expenses  of  the  factors  of  production.  If 
these  are  high,  productivity  being  given,  the  net 
surplus  will  be  small,  and  vice  versa. 

Diagram    IX. 


Combining  our  results,  we  find  that  the  rent  of 
land  absorbs  the  surplus  of  production  from  each 
increment  of  capital  and  labour  invested  by  the  least 
prosperous  undertaker  before  the  marginal  increment 
is  reached.  The  gross  surplus,  or  rent,  then  dej)ends, 
1,  directly  upon  the  amount  of  capital  and  labour 
which  can  be  profitably  invested  upon  it  by  the  least 


210  THE  DISTRIBUTION   OF  WEALTH  chap, 

prosperous  entrepreneur,  which  in  turn  depends  di- 
I'ectly  upon  the  fertility  and  situation  with  reference 
to  markets,  and  inversely  upon  the  expenses  of  the 
factors  of  production ;  and  2,  inversely  upon  the 
expenses  of  the  factors  of  production. 

This  discussion  may  be  made  clear  by  Diagrams 
IX,,  X,  and  XI,  Each  diagram  represents  the  annual 
investment  upon  a  given  area  of  land,  say  one  acre. 
On  the  first  acre,  devoted,  say,  to  the  cultivation 
of  wheat,  it  is  found  profitable  to  invest  only 
$10.^  This  includes  the  expense  of  both  the  capital 
and  the  labour  employed,  but  not  interest  on  the  cap- 
ital. In  the  cultivation  of  wheat,  it  would  involve 
ploughing,  fertilising,  cost  of  seed,  putting  in  the 
crop,  harvesting,  stacking,  threshing,  and  marketing. 
The  farmer  would  not  make  this  annual  investment 
if  he  were  not  normally  certain  of  gaining  from  the 
proceeds  of  his  crop  enough  return  to  replace  each 
dollar  invested,  and  also  the  interest  and  necessary 
profit  upon  the  investment.  Nor  will  he  invest  be- 
yond the  point  where  the  returns  to  the  last  incre- 
ment will  recompense  the  increment  and  the  interest 
and  profit  thereon. 

Let  mp  represent  an  investment  of  $1.  Then 
mno'p  will  represent  the  investment  of  -flO  per  year. 
The  return  to  the  first  dollar  invested  may  be  ws. 
According  to  the  laws  of  increasing  and  diminishing 

1  It  is  to  be  remembered  that  the  anmial  investment,  or  turn- 
over, of  the  farmer,  unlike  that  of  otlier  industries,  is  equal  to  the 
total  capital  invested. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    211 

returns,  the  limit  to  the  returns  on  the  succeeding 
increments  will  follow  the  line  8rx.  But  no  will  be 
the  last  increment  invested,  because  the  farmer  must 
obtain  upon  that  last  increment,  as  upon  each  of  the 
preceding,  a  return  equal  to  no  (the  original  incre- 
ment invested),  plus  o)\  the  necessary  profit  on  the 
same.  If  he  invested  §11,  the  return  on  the  last 
dollar  would  involve  a  loss  of  a  part  of  the  customary 
profits ;  and  if  he  invested  only  -¥9,  the  last  dollar  would 
yield  a  larger  return  than  he  could  obtain  by  invest- 
ing in  other  enterprises  in  his  community.  He  there- 
fore obtains  the  highest  net  returns  on  his  entire 
investment  by  investing  just  $10,  at  which  point  the 
diminishing  returns  of  the  land  itself  will  just  counter- 
balance the  original  investment  and  the  necessary 
profit.  There  will,  of  course,  be  a  surplus  on  preced- 
ing increments  over  and  above  the  replacement  of  the 
investment,  and  interest  and  profits  on  the  same.  If 
this  surplus  has  become  reasonably  fixed  and  calcu- 
lable on  the  basis  of  the  least  prosperous  entrepreneur 
who  can  permanently  sustain  himself,  it  will  become 
petrified  in  the  form  of  rent.  But  if  it  is  a  very 
irregular  and  highly  speculative  surplus,  it  will  fall 
to  the  entrepreneur  proper,  who  will,  of  course,  also 
run  the  risk  of  losing  it  and  his  entire  investment. 

If,  now,  we  pass  to  another  acre  of  ground  better 
situated  respecting  markets,  we  find  the  farmer  can 
invest  profitably  a  larger  number  of  increments. 
But  in  order  to  do  this,  he  must  change  to  a  more 
intensive    culture,   say   vegetable    gardening.     Sup- 


212 


THE   DISTRIBUTION   OF   WEALTH 


pose  he  can  invest  $30  profitably ;  then  de  in  Diagram 
X.  will  represent  the  last  increment,  and  ec  the 
necessary  profits  thereon.  He  stops  investing  at  this 
point,  because  if  he  went  further  he  would  lose  the 
customary  interest  and  profit  on  the  last  increment ; 
and  if  he  did  not  go  so  far,  he  would  not  make  as 

Diagram   X. 


Interest  and 


Profits. 


Replacement. 


20 


e     --..e' 


e' 


30 


much  money  as  it  would  be  possible  to  make.  He 
receives  a  surplus,  then,  on  the  increments  to  the 
amount  of  $30,  above  the  replacement  of  the  same 
and  the  interest  and  profits  thereon. 

Again,  we  may  take  an  acre  of  ground  still  better 
situated.  Here  it  no  longer  pays  to  confine  one's 
self  to  the  agricultural  industries ;  and  by  the  fact 
of   the    greater   profit  which  can   be  obtained   from 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    213 

this  acre,  it  will  inevitably  be  devoted  to  some 
more  intensive  use,  like  manufactures.  Now,  in- 
stead of  *10  or  ^r^SO,  it  pays  to  employ  annuall}^ 
a  capital  of  iSoOOO,  to  be  invested  in  fixed  improve- 
ments and  turnover.  The  line  of  increasing  and 
diminishing  returns  is  BCC  (Diagram  XI.).       The 


DiAGKAM     XI. 


-'--.  C 


G' 


Interest  and  Profits, 


E" 


Replacennent. 


10 10 


2000 


3000 


4000 


5000 


investment  wliich  is  just  remunerated  with  customary 
profits  is  the  five-thousandth,  the  return  to  which  is 
DC^  DE  being  the  replacement  of  the  investment, 
and  EC  the  profits  and  interest.  The  preceding 
investments  amounting  to  $5000  each  3'ield  a  surplus 
which,  if  permanent,  goes  to  rent. 

Thus  it  can  be  seen  that  one  of  the  factors  deter- 
mining the  gross  rent  of  a  given  area  of  land,  is  the 


214  THE  DISTRIBUTION  OF  WEALTH  chap. 

amount  of  capital  and  labour  which  can  be  invested 
profitably  upon  it  by  the  least  prosperous  entre- 
preneur of  the  community ;  and  that  the  rent  (other 
things  being  equal)  varies  directly  as  the  amount 
of  the  investment. 

But  there  is  another  element  which  determines 
the  amount  of  investment  that  can  profitably  be 
made  upon  a  given  area,  viz.  expenses  of  production, 
especially  expense  of  labour  and  expense  of  capital. 

The  expense  of  labour  to  the  employer  is  made  up  of 
the  factors  efficiency  and  wages ;  the  expense  of 
capital,  of  the  factors  efficiency,  depreciation,  and 
rate  of  interest.  I  have  endeavoured  to  represent 
changes  in  these  different  elements  by  means 
of  the  diagrams  separately.  In  Diagram  IX. 
(page  209),  suppose  the  general  efficiency  of 
labour  is  increased,  while  wages  remain  the 
same.  The  new  efficiency  produces  a  product 
whose  limit  of  diminishing  returns  is  represented  by 
the  line  s'r'a;'  instead  of  8rx.  Wages,  customary 
profits,  and  interest  remaining  the  same,  it  will  now 
pay  to  invest  up  to  the  point  n' .  The  investment  at 
this  point  brings  a  return  w  V  which  covers  the  replace- 
ment and  profits.  Consequently  the  number  of 
increments  yielding  a  surplus  is  increased  by  the 
amount  nn' .  The  increment  n  itself  now  yields  a 
surplus,  and  so  do  the  newly  added  increments 
except  w',  which  simply  yields  the  original  marginal 
or  necessary  return. 

The  same  diagram  would  represent  the  increased 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    215 

investments  which  wonhl  be  possible  from  a  general 
increase  in  the  efficiency  of  capital,  interest  and 
depreciation  remaining  the  same.  The  additional 
investments,  vi/<',  in  this  case  would  be  additions 
of  capital  instead  of  additions  of  labour.  If  the 
improvements  in  capital  are  general  and  shared  by 
the  least  prosperous  entrepreneurs,  the  result  would 
be  an  increased  number  of  increments  yielding  a 
surplus,  which  would  go  to  rent. 

In  Diagram  X.  (page  212),  we  may  represent  the 
increased  investments  which  are  possible  with  a 
lowering  of  wages,  efficiency  of  labour  remaining  the 
same.  The  original  number  of  dollars  invested  was 
thirty ;  but  if  wages  fall  so  that  the  share  of  this 
$30  which  goes  to  wages  will  purchase  a  larger 
amount  of  labour,  it  will  be  possible  to  carry  out 
the  investments  to  lower  margins  than  heretofore. 
Let  af  represent  the  original  expense  for  a  given 
amount  of  labour  of  a  given  efficiency.  Wages  are  so 
reduced  that  the  expense  is  af .  Interest  and  profits 
remaining  at  the  same  rate,  it  will  be  possible  to 
extend  the  investments  of  labour  from  d  to  c?'.  The 
return  to  the  increment  d'  is  d'c^  which  covers  the  new 
expense  of  labour,  d'e^  and  the  customary  profits  on 
the  same,  e'c'.  There  are  thus,  as  a  result  of  lowering 
w^ages,  efficiency  remaining  the  same,  an  additional 
number  of  increments,  dd\  on  each  of  which,  except 
the  last,  a  permanent  surplus  is  produced  which  goes 
to  rent. 

This    diagram   will   also   show   the    results    of    a 


216  THE  DISTRIBUTION  OF   WEALTH  chap. 

general  saving  in  the  wear  and  tear,  depreciation, 
and  insurance  of  capital  (not  in  the  rate  of  interest), 
and  a  lowering  in  the  prices  paid  for  capital,  pro- 
viding these  advantages  reach  the  least  prosperous 
entrepreneur.  Wear  and  tear,  etc.,  of  capital,  and 
the  prices  paid  for  capital,  must  be  replaced  out  of 
the  earnings,  and  if  these  are  reduced  there  is  a  less 
amount  to  be  replaced.  Consequently,  efficiency  of 
capital  remaining  the  same,  its  investment  can  be 
carried  to  lower  margins  of  production,  until  the 
point  is  reached  where  return  and  depreciation  are 
again  at  an  equilibrium. 

Diagram  XI.  (page  213)  has  been  modified  to 
show  the  result  of  a  general  lowering  of  the  rate  of 
interest  and  necessary  profits.  Supposing  all  other 
factors  to  remain  constant,  if  the  rate  of  interest  falls 
it  will  be  possible  for  the  entrepreneurs  to  carry  out 
their  investments  to  lower  margins,  and  thus  apply 
larger  amounts  of  capital  to  given  areas  of  ground. 
If  FGr  and  EG  represent  the  original  rate  of  neces- 
sary profit,  including  interest,  and  this  rate  falls  to 
FG\  it  will  be  profitable  for  the  entrepreneur  to 
employ  additional  investments  equal  to  DW ;  be- 
cause a  return  on  the  last  increment  equal  to  D'C" 
will  cover  the  necessary  profits  and  interest  on  an 
investment  equal  to  W E\  Wherever  this  line  may 
intersect  the  line  of  diminishing  returns,  there  will 
have  been  added  a  number  of  increments  equal  to 
DI)\  each  of  which,  except  i)',  yields  a  surplus. 

If   all  these  elements    of   change   are    introduced 


IV     DIMINISIIIXG  RETURNS  AND  DISTRIBUTION    217 

together,  we  may  see  a  geometric  increase  in  the 
quantity  of  capital  which  can  profitably  be  invested 
upon  a  given  area  of  ground.  First,  as  the  situation 
itself  improves  through  the  growth  of  population  and 
consequently  increased  demands  for  working  and 
living  room,  a  larger  amount  can  be  invested,  because 
there  are  wider  sales  and  more  intensive  culture. 
Then  if  to  this  be  added  an  increased  efficiency  of 
labour  and  capital,  a  decreased  rate  of  wages, 
decreased  prices  of  machinery  and  material,  lessened 
expense  in  repairing  the  depreciation  of  capital, 
and  finally  a  lower  rate  of  interest  and  necessary 
profits,  we  may  have  some  idea  of  the  enormous 
possibilities  which  a  progressive  state  of  civilisation 
furnishes  for  the  increased  profitable  employment  to 
landowners  of  labour  and  capital  on  land. 

So  far  for  the  amount  of  capital  and  labour  which 
can  profitably  be  invested  upon  a  given  area  of  land, 
and  which  yields  a  surplus  to  the  least  prosperous 
but  "  vegetative  "  entrepreneur  before  the  marginal 
increment  is  reached.  The  amount  of  rent  depends 
directly  upon  the  number  of  increments  which  can 
be  thus  invested.  But  rent  also  depends  uj)on  an- 
other factor,  the  size  of  the  surpluses  on  each  incre- 
ment. The  size  of  the  surpluses  is  the  difference 
between  two  factors :  1.  The  size  of  the  apfp-resfate 
return  for  each  increment  invested  on  the  area. 
2.    The  expense  of  the  factors  of  production. 

1.  Suppose  the  expenses  for  capital  and  labour  to  re- 
main the  same,  different  tracts  of  ground  will  yield 


218 


THE  DISTRIBUTION  OF  WEALTH 


widely  different  total  returns  on  each  increment  of 
investment,  and  will  exhibit  very  different  curves 
in  their  lines  of  increasing  and  diminishing  returns. 
To  exhibit  this  element  will  require  a  new  diagram. 
(See  Diagram  XII.)     On  each  of   two  pieces  of  land 


Diagram   XII. 


W 


Surplu 


Surplus 


!  nterest  and  Profits. 


Replacement. 


10 


:;n 


of  a  single  acre  each,  there  may  be  invested  annually 
$20.  In  both  cases  the  twentieth  dollar  is  on  the 
margin  of  profitable  expenditure.  But  the  line  of 
diminishing  returns  may  take  on  the  one  the  direc- 
tion VU^  and  on  the  other  that  of  WU.  In  each 
case    the   aggregate    products    will    be    respectively 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    lY) 

HIUV  and  HIUW.  This  difference  in  tlie  gross 
products  of  each  acre  may  be  due  to  two  causes ; 
either,  first,  the  fertility  of  the  soil  which  yields 
a  larger  product  in  one  case  than  in  the  other  to 
the  same  kind  of  cultivation;  second,  the  higher  net 
prices  which  can  be  obtained  at  the  sale  of  the 
product,  owing  to  better  situation,  lighter  expenses  of 
transportation,  lower  taxes,  etc.  In  this  case  the 
better  situation  is  not  enough  to  warrant  a  more 
intensive  cultivation,  because  the  market  for  such  culti- 
vation may  be  already  supplied.  The  farmer  still 
keeps  to  the  old  methods  of  cultivation,  investing  the 
same  amounts  hi  capital  and  labour  on  the  same  areas, 
but  receiving  on  account  of  his  advantages  a  higher 
aggregate  return  on  the  total  investment. 

The  second  element  here  mentioned  (higher  net 
prices)  is  also  characteristic  of  the  advantages  ac- 
cruing to  retail  stores  on  account  of  their  situation 
in  fashionable  shopping  streets,  to  stands  in  city 
markets  which  can  charge  higher  prices  for  their 
goods  on  account  of  the  wealthier  class  of  customers 
who  patronise  them,  to  hotels  and  numberless  other 
occupations  and  situations.  If  the  law  of  diminish- 
ing returns  were  made  to  apply  only  to  the  'produc- 
tion of  goods,  these  facts  could  not  be  brought  within 
its  scope,  and  we  could  not  account  in  full  for  the 
high  rents  that  can  be  obtained  by  reason  of  the  high 
prices  which  are  received  for  products.  Rent  is  a 
function  not  only  of  diminishing  returns  in  product, 
but  equally  of  diminislnng  returns  in  values. 


220  THE  DISTRIBUTION   OF  WEALTH  chap. 

2.  The  surplus  is  the  difference  between  the  ag- 
gregate product  and  the  expenses  of  producing  it.  It 
increases  on  the  one  hand  when  the  aggregate  prod- 
uct increases,  and  on  the  other  when  the  expenses 
diminish.  To  illustrate  this  factor  we  may  return  to 
Diagrams  X.,  page  212,  and  XI.,  page  213.  In 
Diagraiu  X.  the  original  expenses  were  covered  by  the 
rectangle  adcg.  When  expenses  are  lowered  through  a 
lowering  of  wages,  the  total  expenses  for  the  same 
amount  of  capital  are  now  ade''g\  and  there  is  now 
added  to  the  surplus  the  rectangle  g'e'^cg.  Likewise 
in  Diagram  XI.  a  lowering  of  the  rate  of  interest 
increases  the  surplus  by  the  rectangle  G-CU"G-'. 

Summing  up,  we  can  see  that  the  surplus  going  to 
rent  depends  (1)  directly  upon  the  amount  of  capital 
and  labour  which  can  be  profitably  invested  upon  the 
given  area;  (2)  directly  upon  the  size  of  the  returns 
to  each  increment  in  the  course  of  the  increasing  and 
diminishing  returns ;  and  (3)  inversely  upon  the 
expenses  of  capital  and  labour.  We  can  also  see  the 
important  double  part  played  by  the  last  element : 
since  a  decrease  in  the  expenses,  with  the  progress 
of  invention  and  improvement,  the  growing  efficiency 
of  some  labourers  and  the  lessening  wages  of  others, 
not  only  brings  about  a  larger  investment  on  a  given 
area,  thus  increasing  the  number  of  increments  which 
yield  a  surplus,  but  also  deducts  a  less  amount  from 
the  total  product  of  each  increment,  thus  leaving  a 
larger  surplus  to  each.  Now  we  can  add  to  the  above 
noticed   geometric    increase    of   the  qumitity  of    the 


IV      DIMINISHING  RETURNS  AND  DISTRIBUTION    11\ 

surplus-yielding  capital  which  can  be  profitably 
invested  owing  to  the  combined  causes  of  improved 
situation,  increased  efficiency  of  capital  and  labour,  a 
decreased  rate  of  wages,  decreased  prices  of  machin- 
ery and  material,  lessened  expense  in  rejDairing  the  de- 
preciation of  capital,  and  a  lower  rate  of  interest  and 
necessary  profits,  an  additional  geometric  increase 
in  the  ^ize  of  these  surpluses  owing  to  the  same 
causes. 

Rent,  being  determined  as  above  indicated,  now 
becomes  a  permanent  part  of  expenses.  The  entre- 
preneur calculates  upon  it  as  upon  the  other 
expenses  for  labour,  capital,  taxes,  and  transportation. 
In  order  now  to  make  profits,  his  receipts  must  cover 
rent  in  addition  to  other  expenses. 

This  is  true  of  agricultural  as  well  as  of  manu- 
factured products.  The  familiar  dictum  that  rent 
does  not  form  any  part  of  the  expenses  of  production 
of  agricultural  products  is  based  upon  the  supposition 
that  there  is  somewhere  a  no-rent  margin  of  cultiva- 
tion, and  that  the  expenses  of  production  there,  being 
the  highest  actual  expenses  in  the  production  of  agri- 
cultural goods,  set  the  price  for  all  agricultural  goods. 
Since  this  land  pays  no  rent,  of  course  rent  does  not 
enter  into  the  expenses  of  production.  But  as  I  have 
already  shown,  there  is  no  agricultural  product  which 
is  raised  on  no-rent  land.  As  soon  as  land  is  culti- 
vated at  all  successfully,  it  yields  a  permanent  rent, 
and  this,  if  it  be  the  poorest  land  in  use  for  the 
production  of  the  commodity  in  question,  becomes  a 


222  THE  DISTRIBUTION   OF  WEALTH  chap. 

permanent  part  of  the  expenses  of  production  of  that 
commodity.  The  superior  rents  paid  out  of  the  same 
commodity  where  it  is  produced  on  superior  lands  are 
again  an  additional  surplus  growing  out  of  the 
superior  advantages  of  such  lands,  and  are  only 
partly  to  be  considered  as  expenses  of  production. 

II.  So  far  we  have  been  considering  that  funda- 
mental monopoly  privilege,  land,  and  have  discovered 
the  general  principles  underlying  the  emergence  of 
ground  rent.  We  now  turn  to  the  other  monopoly 
privileges. 

The  entrepreneur,  considering  rent  as  a  part  of 
his  expenses,  has  a  margin  above  rent,  not  only  for 
obtaining  necessary  profits  on  his  investments,  but 
also  for  obtaining  additional  personal  and  permanent 
profits.  Here  we  pass  from  the  fourth  standpoint  of 
diminishing  returns,  that  of  a  given  area  of  ground, 
to  the  third,  that  of  a  single  enterprise  ;  and  we  notice 
a  repetition  on  a  higher  level  of  the  phenomena  of 
personal  and  permanent  profits,  and  the  possible 
transition  from  one  to  the  other.  If  profits  are 
temporary,  they  are  due  to  unforeseen  fluctuations  in 
prices,  or  to  the  personal  ability  of  the  entrepreneur. 
If  permanent,  a  second  monopoly  is  superimposed 
upon  the  first,  and  now  absorbs  the  remaining  perma- 
nent surplus.  This  surplus  is  analogous  to  rent. 
We  may  call  it  monopoly  profit.  This  second 
monopoly  may  again  be  absolute  (copyrights,  patents, 
natural  monopolies,  etc.)  or  partial  (good-will  of  a 
competitive  business).     If  the  monopoly  is  absolute, 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    IIZ 

investments  are  not  carried  out  to  the  same  margin 
as  in  other  enterprises,  but  to  the  amount  which  will 
bring  the  highest  net  returns.  Tire  surplus  going  as 
monoply  profits  is  determined  by  the  excess  which 
the  capital  (including  rent)  and  labour  here  invested 
produce  above  what  the  same  amount  of  capital  and 
labour  would  produce  on  the  surrounding  margins  of 
utilisation. 

If  this  second  monopoly  is  a  partial  one,  the  surplus 
going  to  it  is  determined  exactly  as  in  the  case  of 
rent,  namely,  (1)  the  quantity  of  investment  (includ- 
ing rent)  before  the  margin  of  utilisation  is  reached ; 
and  (2)  the  surplus  above  what  the  same  investment 
could  secure  on  the  margin  of  utilisation.  Here  the 
determining  elements  with  reference  to  opportunities 
for  investment  and  expenses  of  production  operate  in 
the  same  ways  as  with  rent ;  and  the  demonstration 
already  given  for  rent  can  be  applied  here,  remember- 
ing only  that  from  this  new  standpoint  rent  itself 
becomes  a  part  of  expenses. 

We  may  summarise  the  argument  of  this  essay  up 
to  this  point  in  the  following  way  :  — 

Monopoly  privileges  in  modern  industry  are  social 
and  legal  creations  whose  common  features  consist  in 
the  fact  that  they  afford  opportunities  for  labour, 
capital,  and  business  ability  to  unite  in  the  produc- 
tion of  goods,  to  find  a  market  for  the  profitable  sale 
of  goods,  and  to  limit  the  supply  of  those  goods  rela- 
tively to  the  demand.  The  fundamental  monopoly 
privilege  is  land,  whose  significant  characteristics  are 


224  THE  DISTRIBUTION  OF  WEALTH  chap. 

room  and  situation,  i.e.  access  to  markets.  This  and 
other  monopoly  privileges  all  depend  upon  the  insti- 
tution of  private  property.  Some  of  them,  however, 
including  land,  distributive  industries,  trusts,  good 
will,  etc.,  grow  naturally  out  of  private  property  in 
economic  instruments ;  while  others,  like  patents, 
copyrights,  trademarks,  franchises,  are  expressly 
created  by  the  legislature,  and  are  assigned  to 
individuals  as  their  private  property. 

In  modern  industry,  the  law  of  diminishing  returns 
finds  its  true  significance  in  the  field  of  value  rather 
than  product,  and  it  is  applicable  only  to  the  monop- 
oly privileges  herein  described.  This  law  is  the 
basis  of  the  law  of  rent,  which  is,  therefore,  found  to 
be  inappropriate  in  explaining  the  returns  to  capital 
and  personal  abilities,  but  to  be  a  universal  law  pecu- 
liarly characteristic  of  all  monopoly  privileges.  The 
application  of  the  laws  of  diminishing  returns  and 
rent  to  different  monopoly  privileges  is  identical  in 
principle,  though  varying  somewhat  in  the  complexity 
of  details.  The  law  of  rent  of  land,  applying  only  to 
room  and  situation,  should  be  looked  upon  as  having 
reference  always  to  an  area  of  ground  of  a  given  unit, 
say  one  acre,  no  matter  where  located  or  for  what 
kind  of  industry  it  is  employed.  The  difference 
between  the  different  situations  of  this  given  unit 
are  to  be  found  not  in  the  kind  of  labour  and  capital 
employed,  but  simply  in  the  different  amounts  of 
labour  and  capital  which  can  be  profitably  invested. 
The  limit  to  this  amount  is  set  at  the  point  in  the 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    225 

progress  of  diminishing  returns  where  returns  to  the 
niiirginal  investments  are  barely  sufficient  to  cover 
the  expenses  of  those  investments.  This  is  exactly 
the  same  and  only  difference  existing  between  the 
other  monopoly  privileges.  But,  compared  with 
land,  these  other  monopolies  are  to  be  looked  upon 
as  employing  not  only  labour  and  capital,  but  also 
land  itself ;  and  payments  for  the  rent  of  land,  there- 
fore, become  a  part  of  their  expenses  of  production, 
like  wages  and  interest,  and  subject  to  a  similar  law 
of  diminishing  returns.  Employers  who  utilise  these 
monopoly  privileges,  invest  the  factors,  capital, 
labour,  and  land,  in  connection  with  them  up  to  the 
point  where,  in  the  progress  of  diminishing  returns, 
the  returns  to  the  marginal  increments  invested  in 
one  factor  are  equal  to  those  invested  in  other 
factors;  and  where,  at  the  same  time,  the  marginal 
returns  to  all  increments  are  barely  sufficient  to 
cover  the  expenses  of  those  increments.  How  far 
these  investments  shall  be  carried  out  depends, 

(1)  Directly  upon  the  extent  of  the  opportunity 
offered  by  the  monopoly  privilege  in  question,  i.e. 
the  social  demand  for  the  product  created  in  connec- 
tion with  it ;  and 

(2)  Inversely  upon  the  expenses  to  be  paid  for  the 
services  of  the  co-operating  factors,  labour,  capital, 
and  (in  the  case  of  secondary  monopolies)  land,  and 
generally,  also,  contributory  secondary  monopolies. 

In  all  cases  the  increments  invested  before  the 
marginal  increments  yield  each  a  surplus  wdiich  goes. 


226  THE  DISTRIBUTION  OF   WEALTH  chap. 

in  the  case  of  land,  to  the  landowner  as  rent,  in  the 
case  of  secondary  monopolies,  to  the  monopolists  as 
permanent  monopoly  profits  analogous  to  rent.  The 
"  increments "  themselves  are  arbitrary  compound 
units  of  expense,  e.g.  one  dollar,  composed  of  pay- 
ments made  for  labour  and  capital  in  definite  pro- 
portions according  to  the  economies  of  the  several 
enterprises  ;  and,  in  the  case  of  secondary  monopolies, 
composed  also  of  payments  for  definite  proportions  of 
labour,  capital,  rent  of  land,  and  monopoly  profits  on 
contributing  secondary  monopolies.  The  total  rent, 
or  monopoly  profit,  falling  to  a  particular  monopoly 
privilege,  depends  upon  the  total  number  of  these 
increments  which  can  be  profitably  invested,  each 
yielding  a  surplus,  and  upon  the  sizes  of  the  surpluses 
on  each.  Rent  and  monopoly  profits,  therefore,  in- 
crease both  when  the  monopoly  privilege  offers  wider 
opportunity  for  the  sale  of  products  in  larger  quan- 
tities or  at  higher  prices;  and  also  when  there  is  a 
lessening  of  the  expenses  to  be  paid  for  the  services 
of  the  co-operating  factors,  labour,  capital,  land,  and 
the  contributing  secondary  monopolies. 

The  differences  between  monopoly  privileges  are 
mainly  differences  in  the  first  factor,  namely,  the  extent 
of  these  opportunities.  Regarding  the  second  factor, 
namely,  the  expenses  for  labour  and  capital,  the  laws 
controlling  these  grow  directl}^  out  of  the  action  and 
reaction  between  man  and  his  environment.  On  the 
objective  side,  wages  and  interest  are  both  subject  to 
the  downward  pressure  of  the  universal  law  of  dimin- 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    111 

ishing  returns,  which  lessens  the  product  of  marginal 
labour  and  marginal  capital,  in  proportion  as  labour 
and  capital  become  abundant  compared  with  opportu- 
nities, and  new  labourers  and  new  capital  are  com- 
pelled to  take  resource  to  lower  margins  of  production ; 
and  then,  through  free  competition  between  labourers 
and  capitalists,  and  the  law  of  indifference,  the  wages 
of  all  like  labourers  and  the  interest  on  all  similarly 
situated  capital  are  reduced  to  a  level  with  the  wages 
and  the  interest  of  the  marginal  labourers  and  the 
marginal  capital.  With  regard  to  wages,  there  are 
additional  objective  conditions,  consisting  in  the 
personal  rights  of  life  and  liberty  (including  free- 
dom of  contract,  freedom  of  movement,  the  free  use 
of  a  portion  of  Nature's  gifts,  and  the  free  use  of 
public  property),  and  also  the  partial  right  to  em- 
ployment. These  legal  rights  guarantee  to  the 
labourers  a  minimum  of  subsistence  and  also  the 
free  use  of  such  powers  as  they  may  possess  and 
exert  in  their  efforts  to  compel  payment  in  exchange 
for  their  services,  and  to  limit  their  numbers  and 
widen  their  opportunities  in  such  a  way  as  to 
maintain  a  high  marginal  product  for  labour.  With 
regard  to  capital,  the  corresponding  objective  condi- 
tions are  the  rights  of  property,  which  give  capitalists 
freedom  to  command  pa3anents  in  return  for  the 
use  of  their  capital,  the  amount  of  the  payments 
depending  upon  their  guaranteed  freedom  to  limit 
the  supply  of  capital  relatively  to  the  demand,  so  as  to 
keep  the  marginal  utility  as  high  as  may  be  in  their 


228  THE   DISTRIBUTION  OF  WEALTH  chap. 

power.  Personal  and  property  rights  furnish  the 
framework  within  which  human  passions  and  ener- 
gies are  permitted  more  or  less  freely  to  operate  in 
the  efforts  of  man  to  resist  the  pressure  of  the  law 
of  diminishing  returns.  This  leads  us  to  the  subjec- 
tive side  of  the  laws  of  wages  and  interest. 

With  regard  to  wages,  the  subjective  conditions  are 
mainly  those  moral  attributes  of  capacity  for  organ- 
isation, ambition,  education,  public  opinion,  high 
standard  of  living,  which  enable  labourers  to  control 
their  numbers  relatively  to  the  demand  for  their 
services,  and  thus  to  keep  up  their  marginal  utility. 
When  this  control  over  numbers  does  not  exist,  as 
with  the  unorganised,  inefficient,  and  women  workers, 
wages  are  depressed  through  the  law  of  diminishing 
returns  to  the  minimum  of  existence  as  guaranteed 
by  poor  relief  and  prison  fare.  With  regard  to  inter- 
est, the  subjective  conditions  are  also  mainly  moral 
attributes,  like  self-control,  intelligence,  foresight, 
thrift,  provision  for  children,  which  promote  increased 
saving  of  capital.  But,  as  contrasted  with  wages, 
these  moral  attributes  do  not  keep  up  the  rate  of  in- 
terest, but  tend  to  lower  it  by  increasing  the  supply 
of  capital  relatively  to  the  demand ;  though  of  course, 
with  progressive  civilisation,  the  gross  income  of  cap- 
italists, as  a  class  or  as  individuals,  is  not  diminished, 
but  greatly  increased,  since  the  quantity  of  capital 
increases  in  greater  ratio  than  the  rate  is  depressed. 

With  the  lessening  of  expenses  on  account  of 
labour  and  capital,  brought  about  through  the  prog- 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    11^ 

ress  of  civilisation  either  by  the  increased  efficiency  of 
both  or  by  lowered  wages  and  interest,  there  remains 
a  continually  growing  surplus  falling  to  the  owners 
of  monopoly  privileges,  which  becomes  petrified  in  the 
form  of  rent  and  permanent  monopoly  profits. 

Finally,  as  the  central  figure  in  modern  industry, 
and  the  one  to  which  all  other  factors  are  referred, 
there  is  the  entrepreneur  proper,  who  takes  the  main 
risk  of  business,  who  plays  the  part  of  buffer  to  all 
the  other  factors,  and  who  receives  a  share  in  the 
product,  the  amount  of  which  is  governed  by  two 
distinct  laws :  — 

1.  A  necessary  profit,  without  a  fair  prospect  of 
which  the  entrepreneur  will  not  enter  upon  a  new 
undertaking  nor  extend  an  old  one,  and  which  is  to 
be  looked  upon  as  compensation  for  risk  and  manage- 
ment. In  amount  it  is  approximately  equal  to  the 
current  rate  of  interest,  and  is  estimated  upon  the 
capitalisation  (i.e.  value)  of  the  factors  employed, 
namely,  capacity,  turnover,  land,  and  permanent  mo- 
nopoly privileges. 

2.  A  personal  or  temporary  profit,  which  is  a  con- 
tingent surplus  developing  in  the  progress  of  an 
enterprise  already  established,  and  is  to  be  con- 
trasted with  lo8^.  Its  amount  depends  upon  the  per- 
sonal abilities  of  the  entrepreneur,  good  fortune,  and 
fluctuations  in  prices. 


Permanent  monopoly  profits,  going  either  to  land 
in  the  form  of  rent  or  to  the  secondary  monopolies, 


230  THE  DISTRIBUTION  OF  WEALTH  chap. 

are  shown  in  the  phenomena  of  capitalisation.  Land 
is  capitalised  at  the  present  valne  of  the  future  rents 
that  are  destined  to  fall  to  it,  and  secondary  monop- 
olies are  likewise  capitalised.  Permanent  profits  take 
the  form  of  interest  on  the  capitalisation,  correspond- 
ing to  the  current  rates  of  interest.  These  permanent 
profits  again  become  fixed  charges  and  a  part  of  the 
expenses  of  production,  as  in  the  case  of  rent.  An 
entrepreneur  who  leases  a  patent  right  must  pay- 
royalties  on  his  products,  and  these  become  true  and 
unavoidable  expenses  in  production,  the  same  as  rent 
of  land.  Or  if  he  purchases  the  patent  at  a  capital- 
isation, he  must  secure  interest  on  his  purchase  money, 
i.e.  permanent  profits  on  his  monopoly  privilege.  The 
entrepreneur  who  makes  use  of  these  monopolies  must 
calculate  on  these  fixed  charges  the  same  as  on  other 
expenses.  But  there  still  remains  to  him  over  and 
above  all  his  expenses  (including  now  rent  and  mo- 
nopoly profits)  the  opportunity  for  temporary  profits 
—  the  pure  profits  of  the  entrepreneur.  These  are  de- 
termined by  the  difference  between  his  expenses  (in- 
cluding rent  and  monopoly  profits)  and  his  receipts. 
They  vary  with  fluctuations  in  prices,  and  depend 
upon  his  ability  as  an  industrial  leader.  They  are 
only  temporary  and  passing,  at  the  furthest  no  longer 
in  duration  than  his  own  life.  They  are  not  some- 
thing the  right  to  which  he  can  sell  to  another,  be- 
cause they  offer  no  promise  of  permanency.  It  is 
only  permanent  profits  which  can  be  capitalised.  If 
temporary  profits  develop  into  permanent,  it  is  be- 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    231 

cause  of  certain  social  and  economic  advantages  and 
relations  which  spring  into  being  with  the  develop- 
ment of  his  business.  The  office  and  justification  of 
the  entrepreneur  is  to  develop  these  permanent  ad- 
vantages, to  direct  industry  into  the  most  productive 
channels.  But  in  doing  so  he  sees  these  personal 
profits  absorbed  by  other  elements.  His  own  pure 
profits  are  never  more  than  temporary.  They  are  the 
phases  of  change  in  industry,  and  endure  only  until 
the  valuation  of  the  other  permanent  elements  can 
rise  and  absorb  them. 

I  have  assumed  throughout  that  the  entrepreneur, 
capitalist,  labourers,  and  owners  of  permanent  mo- 
nopolies were  entirely  different  persons,  and  that  free 
competition  existed  among  them.  This  gives  a  cer- 
tain exactness  to  the  analysis,  but  it  is  necessary  to 
modify  these  assumptions.  We  are  familiar  with  the 
way  in  which  this  is  done  for  the  four  great  partners 
in  distribution.  I  have  introduced  one  more  partner, 
the  owner  of  the  secondary  monopoly,  and  have  dis- 
tinguished him  from  the  entrepreneur.  But  in  truth, 
the  entrepreneur  is  almost  always  owner  of  the  sec- 
ondary monopoly.  He  is  the  pioneer  in  the  devel- 
opment of  that  monopoly,  and  as  it  grows  into  a 
permanent  capitalisation,  it  becomes  a  part  of  his 
fortune.  This  is  the  case  with  a  joint-stock  com- 
pany, whose  property  is  often,  especially  in  railroads, 
simply  the  ownership  of  the  secondary  monopol3%  the 
franchise.  Land  and  right  of  way  are  purchased  and 
roads   are  built  out  of  the  proceeds  of  the  sale  of 


232  THE  DISTRIBUTION   OF  WEALTH  chap. 

bonds.  The  corporation  is  also  the  entrepreneur,  and 
temporary  profits  are  added  to  whatever  permanent 
profits  may  be  developed.  Yet  it  is  no  new  thing  for 
a  corjDoration  to  sell  or  lease  its  property  to  another 
corporation,  the  price  being  agreed  upon  with  refer- 
ence to  its  permanent  earning  powers.  The  new 
corporation  becomes  now  the  entrepreneur  proper, 
and  secures  for  itself  only  temporary  profits. 

We  may  here  briefly  note  the  elements  entering 
into  the  capitalisation  of  permanent  profits.  The 
simplest  problem  is  rent.  Rent,  being  the  aggregate 
surplus  of  production,  varies,  1.  directly  with  the 
amount  of  capital  which  can  be  invested  on  a  piece  of 
land.  This  is  greater,  of  course,  in  thickly  populated 
districts  and  cities.  2.  It  varies  inversely  with  inter- 
est and  wages,  owing  both  {a)  to  the  larger  amount 
of  capital  and  labour  which  can  be  invested  where 
interest  and  wages  are  low,  before  the  maigin  is 
reached,  and  (6)  to  the  greater  surplus  Avhich  re- 
mains where  wages  and  interest  are  low  on  each 
increment  of  investment.  This  would  also  tend  to 
make  rents  highest  in  cities.  3.  Rent,  being  thus 
determined,  is  capitalised  at  the  current  rates  of  in- 
terest for  the  community.  In  our  eastern  states  it  is 
capitalised  at  5%  and  6%.  In  the  western  states  at 
10%  or  12%.  Hence,  in  the  east  and  eastern  cities, 
capitalisation  would  tend  to  double  the  value  of  land 
compared  with  the  west.  4.  Furthermore,  with  the 
progressive  fall  in  rates  of  interest,  capitalisation 
correspondingly  rises. 


IV      D/M/.VISH/NG  RETURNS  AND   DISTRIBUTION    233 

The  same  conditions  liold  true  for  the  capitaHsa- 
tion  of  monopoly  profits.  Tlie  combination  of  all 
these  factors,  being  a  geometric  increase,  accounts  for 
the  enormous  rise  of  fortunes  in  the  last  twenty-five 
years. 

What  has  been  said  will  throw  some  light  on  the 
alleged  tendency  of  profits  to  an  equality  and  a  mini- 
mum. The  aids  and  hindrances  usually  assigned  to 
this  tendency  are  the  greater  or  less  intelligence  and 
business  energy  of  the  community,  the  greater  or  less 
publicity  of  the  profits  of  a  business,  and  the  natural 
or  legal  difficulties  which  stand  in  the  wa}^  of  start- 
ing new  enterprises.  In  the  case  of  personal 
profits  the  hindrances  to  equality  are,  of  course,  only 
temporar3^  Bat  in  the  greater  part  of  the  developed 
industries  of  our  day  these  hindrances  are  the  rule, 
and  temporary  profits  are  gradually  transformed  into 
permanent  ones.  The  pioneer  farmer  who  opens  up 
a  new  tract  of  land,  earns  besides  interest  and  wages 
a  surplus  in  profits.  In  the  course  of  time  this  profit 
becomes  a  fixed  surplus  on  the  annual  investments 
upon  the  tract.  No  longer  is  it  profits  but  rent  — 
i.e.  a  fixed  monopoly  profit.  A  new  entrepreneur 
coming  in  now  and  purchasing  or  leasing  this  tract 
of  land,  before  he  can  earn  strictly  entrepreneur 
profits  must  first  earn,  not  only  interest  and  wages 
upon  his  annual  investments,  but  also  the  fixed 
monopoly  profit,  rent.  Over  and  above  these  earn- 
ings there  is  a  fluctuating  surplus  which  is  the  true 
entrepreneur  profits.      This    may   tend   to   equality 


234  THE  DISTRIBUTION  OF  WEALTH  chap. 

throughout  the  community  if  competition  be  free ; 
but  the  equality  may  come  about  in  two  ways : 
either  (1)  the  profits  may  be  forced  clown  through 
severe  competition,  or  (2)  the  permanent  profits  may 
be  levelled  up  owing  to  the  developed  advantages 
which  the  tract  of  land  exhibits,  or  to  the  facilities  it 
offers  for  keeping  up  the  prices  of  its  product,  while 
the  prices  of  other  tracts  are  lowered.  In  either 
case  temporary  profits  are  reduced  to  the  level  of 
corresponding  profits  in  the  same  or  other  industries. 

In  the  second  case  the  true  nature  of  the  phenom- 
enon is  concealed  by  the  phenomena  of  capitalisation. 
As  the  rent  of  the  tract  of  land  increases,  this  rent  is 
capitalised  at  the  current  rate  of  interest,  and  thence- 
forth the  value  of  the  land  becomes  to  the  entrepre- 
neur as  so  much  capital  on  which  he  must  earn 
interest.  The  rate  of  interest  on  the  value  of  the 
land  is  not  increased,  but  the  value  itself  of  the  land 
is  increased  to  such  an  extent  that  it  exactly  counter- 
balances the  increased  rental,  and  consequently  keeps 
the  rate  at  its  former  figure.  The  entrepreneur  now 
has  larger  permanent  expenses,  and  though  his  total 
earnings  may  be  increased,  his  (temporary)  profits 
are  kept  at  a  level  with  those  of  other  entrepreneurs. 

The  same  is  true  of  other  permanent  monopolies. 
Wherever  these  appear  there  is  an  apparent  equalis- 
ing of  entrepreneur's  profits  owing  to  the  capital- 
isation of  the  monopoly.  But  the  equalising  is  a 
rising-up  of  the  underlying  monopoly,  which  swal- 
lows the  permanent  profits,  rather  than  a  levelling 
down  of  the  entrepreneur's  profits. 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    235 

Entrepreneurs'  personal  profits  play  a  large  part 
in  the  early  history  and  the  transition  stages  of  a 
country's  industry.  Their  risks  are  greater,  and  the 
bold  successful  undertaker  makes  large  profits  in 
short  periods,  while  the  unsuccessful  quickly  disap- 
pear. But  with  the  progress  of  time,  the  growing- 
organisation  of  industry,  and  the  occupation  of 
opportunities,  business  becomes  less  risky,  temporary 
monopolies  which  are  not  based  on  lasting  conditions 
disappear,  permanent  monopolies  find  their  appropri- 
ate development  and  become  fixed.  The  element  of 
risk  gradually  lessens,  and  with  its  diminution  there 
is  a  corresponding  increase  in  the  permanent  profits 
and  the  capitalisation  of  the  same.  The  heads  of 
industries  are  no  longer  the  independent  Xapoleons 
of  finance ;  they  find  their  sphere  as  high-salaried 
managers  and  legal  advisers,  while  the  successors  of 
the  entrepreneurs  proper,  the  original  organisers  and 
promoters  of  enterprises,  are  simply  the  common- 
place, idle  recipients  of  the  permanent  profits  and 
the  mildly  fluctuating  temporar}"  profits. 

These  considerations  have  a  very  definite  bearing 
on  the  discussions  regarding  the  justification  of  the 
entrepreneur's  profits.  It  is  held  that  the  entrepre- 
neur's activity  is  a  highly  economic  one.  He  creates 
a  product  over  and  above  the  interest  and  wages 
which  he  pays.  He  performs  a  service  to  society, 
because  capital  alone  cannot  produce  goods,  neither 
can  labour  alone  ;  but  the  entrepreneur  unites  them 
into  a  productive  process,  himself  taking  the   risks 


236  THE  DISTRIBUTION   OF  WEALTH  chap. 

and  guaranteeing  to  capital  and  labour  the  proper 
reward  for  their  services.  If  the  consuming  public 
performed  this  service  it  would  be  at  a  much  higher 
expense.  The  entrepreneur  takes  the  raw  product 
and  gives  it  exchange  value  by  making  it  satisfy  the 
wants  of  consumers.  He  is  the  most  important  ele- 
ment in  production,  for  he  is  the  guiding  force  which 
turns  capital  and  labour  into  those  channels  where 
they  can  really  satisfy  human  needs  and  thus  alone 
makes  it  possible  for  them  to  receive  interest  and 
wages.  Though  profits  may  often  be  higher  than  a 
just  distribution  may  warrant,  yet  on  the  whole  the 
justification  of  profits  in  itself  cannot  be  questioned. 

This  line  of  reasoning  is  perfectly  valid,  and  cannot 
be  too  strongly  emphasised  so  long  as  strictly  entre- 
preneur's personal  profits  are  under  consideration. 
A  wise  public  policy  will  encourage  to  the  utmost 
the  development  and  the  rewards  of  personal  abilities 
in  the  organisers  and  promoters  of  business.  But  the 
case  becomes  entirely  different  when  temporary  profits 
have  become  transformed  into  permanent  monopolies. 
Now  instead  of  the  profits  being  due  to  the  powerful 
exertions  and  abilities  of  the  captains  of  industry, 
they  are  due  to  certain  fixed  social  relations  and 
rights.  The  recipients  of  these  incomes  may  with 
perfect  security  become  idlers  and  drones.  They 
abdicate  their  functions  as  entrepreneurs  into  the 
hands  of  salaried  chiefs  and  advisers.  They  are  no 
longer  performing  the  services  to  society  which  were 
performed  by   their   ancestors    or  predecessors,  who 


IV     DIMINISHING  RETURNS  AND  DISTRIBUTION    111 

organised  and  developed  the  business  to  which  they 
have  succeeded.  There  is,  of  course,  in  all  cases  that 
marginal  zone  of  temporary  profits,  over  and  above 
the  permanent  profits,  depending  on  the  fluctuations 
of  business,  and  the  particular  abilities  of  the  manager 
in  charge.  It  is  to  the  interest  of  society  to  stimu- 
late as  much  as  possible  the  workers  in  this  zone. 
All  new  economies,  new  inventions,  widening  of 
markets  should  be  encouraged;  and  the  new  profits 
arising  therefrom  should  go  wholly  to  these  marginal 
entrepreneurs,  as  the  reward  of  their  enterprise. 
But  society  might  care  for  the  permanent  profits  in 
entirely  different  ways,  without  injury  to  industry. 
It  might  appropriate  them  through  taxation,  as,  for 
example,  taxes  on  land  values,  franchises,  and  inherit- 
ances ;  but  in  any  case  sufficient  margin  should  be 
allowed  for  the  wide  play  and  scope  of  the  pure 
entrepreneur's  profits. 


CHAPTER   V 

STATISTICAL   DATA 

The  application  of  the  foregoing  principles  of  dis- 
tribution to  the  different  branches  of  industry  would 
involve  a  statistical  problem  which  is  as  yet  insoluble 
on  account  of  the  absence  of  data.  But  it  will  be 
possible  to  present  a  comparative  study  in  agricul- 
tural statistics  which  will  verify,  as  far  as  it  goes, 
what  has  already  been  said.  The  accomj)anying  table 
on  page  239,  showing  the  facts  of  distribution  in 
the  single  industry  of  wheat-growing  in  different 
parts  of  the  United  States,  and  the  comparison  with 
cabbage-growing  in  Ohio,  was  collated  by  the  writer 
several  years  ago,  and  has  served  as  the  starting-point 
for  the  present  investigations.  It  will,  of  course,  not 
be  expected  that  any  except  the  most  prolonged  and 
minute  statistical  investigations  could  verify  exactly 
the  principles  laid  down.  All  that  can  be  hoped  is 
to  show  that  the  tendencies  are  in  the  direction  here 
indicated.  Allowance  will  need  to  be  made  by  the 
reader's  sense  of  all  the  minute  fluctuations  and 
details  which  necessarily  enter  into  statistical  presen- 
tations of  this  kind,  covering  a  series  of  years  and 
averaging  up  the  experiences  of  whole  communities, 

238 


STATISTICAL  DATA 


239 


^ 

p          -p      y.          ^          p 

01  4-        Vi       to 

l-l 

>tj         2:     >         H         CO 

!z:o    ^   < 

> 

urpliis  for  rent  of  land, 
permanent      improveiin 
personal  profit  (subtrac 
stimated  value  of  land  au 
nients    (obtained    by   c 
item  (J  at  double  the  rate 
etual  value  of  land  anc 

ments 

eeessary  profits  on  actu 
land  and  impi-ovements 
the  rate  ol'  interest   .     . 
ersonal  protits  of  entrepr 
ferciiei'  lu'tween  items  (i 

-  0  2  ^ 

p  ~  s  •; 

?Px   § 

;£,=  P  r» 

g.H^  p 

ra  »  S  S' 

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TO)©              _ 
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S-  0    S    ri-  a 

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H 
s 

interest  on 
snts,     and 
t  5  from  2 
idimprove- 
apitalising 
of  interest) 
I  im  pro  ve- 
al value  of 
,  at  double 

eneur  (dif- 
aud  9) .    . 

IT:  -  ^^  ■ 

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II    ^^   s 

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^      t 

§ 

1               ^    ^ 

b;^"»_.      w      -bj-i-^*- 

^ 

^ 

1         ,_.           to       l-i            t-i 

►-l     p         p     p         ?^ 

J-* 

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^i 

4-         CC                00                rfi 

bo  bi 

bi  b 

00         00         0 

©  toao_^g>      ■    000  0  4c 

OiCOO 

H  2  S 

^  ^^  s 

^1  ' 

^       0 

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^       a 

1 

,_, 

m\    m           c:    m 

^ 

H-           oc      to           to 

-q   I-'  rs                -■■  --c  c; 

>— 1 

H*lO       ^ 

^:^ 

■r      C3          b      -J          bi 

to  iob      1-'      H'^b  ^1^1 

01  b 

2«=' 

5-B    ^ 

Ol          0                 0          OT                 CT 

0    C  C  -^  ~        .-  01  C    Ol  On 
II          010        s               ._^_ 

to        §*  «-         C-- 

0                       C 

1  ?  B 

1 

4e         ^                   ^       ^ 

p    I-'  pi                    ^  00  Ol       ►"• 

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7.35 
8.00 

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p"5' 

0^ 

p      p           Ol      f-  -j-i.  P 

CC   hfi'Ol       fee                  ji 

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00      to          b      b  -^  ~  01 

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II     «^«*    :f           en? 

>  z   . 

Is 

^               %y^m   - 
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OT  C3        *> 

b^i      OT 

K  0 

--Sot     c 

^ 

OCT        0 

240  THE  DISTRIBUTION  OF  WEAITH  chap. 

to  say  nothing  of  the  different  estimates,  motives, 
and  painstaking  of  the  different  individuals  upon 
whom  one  must  depend  for  his  figures.  Yet  the 
table  is  given  for  what  it  is  worth. 

The  problem  here  before  us  is  to  determine  from 
the  annual  investments  of  capital  and  labour  and  the 
prevailing  rates  of  profits  in  different  parts  of  the 
country,  what  will  be  the  surplus  which  goes  to 
the  rent  of  the  land,  and  the  consequent  value  of  the 
land.  The  data  were  ascertained  by  inquiring  for 
figures  upon  the  items  indicated  under  the  numbers 
1,  2,  4,  and  8.  That  is  to  say,  the  facts  ascertainable 
were  (1)  the  amount  of  capital  annually  invested 
upon  a  given  acre  of  land ;  (2)  the  net  value  of  the 
total  product  per  acre ;  (3)  the  current  rates  of  in- 
terest ;  and  (4)  the  actual  values  of  the  land  and 
permanent  improvements  per  acre.  On  the  last  point, 
I  believe,  is  the  only  deficiency  of  the  tables.  It 
would  have  been  pertinent  to  the  present  discussion 
if  the  value  of  improvements,  apart  from  the  value 
of  the  ground,  could  have  been  obtained ;  but  the 
difiiculties  in  correctly  distinguishing  between  the 
two  in  agriculture,  are  well  known  to  be  very  great, 
and  so  no  attempt  is  made.  Yet,  as  will  be  shown 
presently,  this  deficiency  is  unimportant  so  far  as 
concerns  its  consequences  upon  the  general  conclu- 
sions. 

While  items  1,  2,  4,  and  8  are  the  available  facts, 
items  3,  5,  6,  7,  9  and  10  are  calculations  and  deduc- 
tions based  upon  them. 


V  STATISTICAL  DATA  241 

Taking  up  first  the  consideration  of  wheat-produc- 
tion, it  was  deemed  necessary  to  compare  conditions 
wliere  different  rates  of  interest  prevailed.  The 
points  selected  were  the  average  conditions  first  in 
eastern  Ohio,  where  the  ruling  rate  of  interest  was 
6%  ;  second,  northwestern  Ohio,  where  the  rate  was 
7  %  ;  third,  Perkins  County,  Nebraska,  where  the 
rate  was  10  %  ;  and  fourth,  Sprink  County,  Dakota, 
where  also  the  rate  was  10  %. 

The  principles  on  which  the  calculations  were 
based  may  be  shown  by  examining  the  sample  acre 
in  eastern  Ohio.  Here  the  annual  investment  in- 
cludes the  ploughing,  cost  of  seed,  putting  in  crop, 
hauling,  stacking,  threshing,  and  hauling  the  grain 
to  market,  the  total  cost  being  $13.62  per  acre.  The 
croj)  of  twenty  bushels  at  the  average  price  for  a 
series  of  years  brings  $18.00.  This  is  132  %  of  the 
annual  investment,  and  if  this  were  the  only  element 
involved,  the  farmer's  profits  would  be  32  %.  But 
competition  compels  him  to  rest  satisfied  with  a 
profit  on  his  annual  investment  no  higher  than 
that  which  is  being  earned  on  disposable  capital  in 
adjoining  enterprises.  This  is  the  necessary  profit 
which  has  already  been  discussed.  Assuming  that 
the  necessary  profits  are  double  the  current  rates 
of  interest  in  an  industry  like  farming  which  is 
conducted  on  a  small  scale,  the  farmer  in  eastern 
Ohio  must  secure  in  the  price  of  his  product  not 
only  the  replacement  of  his  annual  investment  of 
$13.62,  but   also    12  %    profits    thereon.     He    could 


242  THE  DISTRIBUTION  OF  WEALTH  chap. 

not  on  the  whole  secure  more,  because  then  his 
competitors  would  outbid  him  for  his  situation ;  and 
he  would  not  accept  less,  because  his  expenses  and 
standard  of  living  require  this,  and  he  could  get  more 
by  leaving  his  piece  of  land  and  going  elsewhere. 
This  is  the  reason,  too,  why  he  does  not  invest  more 
than  $13.62  per  year  on  each  acre.  Further  invest- 
ments would  lead  him  down  to  a  point  of  diminishing 
returns  where  he  could  not  recuperate  his  necessary 
profit. 

If  his  necessary  profit  is  12  %,  then  to  pay  him 
for  his  annual  investment  of  $13.62,  he  must  get 
an  annual  return  of  $15.25.  This  return  will  pay 
him  as  well  as  he  can  do  elsewhere ;  so  he  is  content 
with  it,  and  bases  his  calculations  upon  it  as  to  his 
ability  to  pay  rent.  Seeing,  that  on  the  average,  the 
total  return  per  acre  is  $18.00,  there  remains  a 
surplus  above  his  necessary  returns  of  $2.75. 

How  is  the  farmer  to  look  upon  this  permanent 
surplus  with  reference  to  his  business  interests?  It 
will  be  noticed  that  I  have  not  included  in  the  annual 
investments,  or  expenses  of  production,  any  reference 
to  "  interest  on  the  value  of  the  land."  Yet,  in  each 
of  these  cases,  entrepreneurs  unfailingly  estimate  in- 
terest on  the  value  of  their  land  (/.  e.  rent),  as  a  part 
of  their  necessary  expenses.  Rent,  then,  must  come 
out  of  this  surplus.  But  will  the  whole  of  it  go  to 
rent?  I  have  already  stated  that  "permanent  im- 
provements "  and  "  land  "  are  so  inextricably  bound 
together  in  these  enterprises,  that  they  cannot  sue- 


V  STATISTICAL  DATA  243 

cessfully  be  differentiated.  Hence,  though  I  have 
indicated  ••interest  on  permanent  improvements"  as 
a  part  claimant  in  the  surplus,  for  present  practical 
purposes,  this  item  might  be  looked  upon  wholly  as 
one  element,  the  "  rent  of  land." 

But  rent,  even  as  thus  viewed,  cannot  absorb  the 
whole  of  this  surplus.  Rent  always  bears  a  fairly 
exact  proportion  between  the  current  rates  of  interest 
and  the  capitalisation  of  the  land.  The  landowner 
is,  to  all  intents,  a  capitalist,  and  loans  his  land  just 
as  the  capitalist  loans  his  capital.  He  loans  it  for 
whatever  rental  he  can  get.  The  rental  is  to  him 
just  the  same  as  so  much  interest  on  capital  which  he 
may  possess.  Therefore,  he  considers  the  land  to  be 
worth  as  much  as  an  amount  of  capital  which  would 
bring  to  him  annually  the  given  lump  interest.  That 
is  to  say,  he  capitalises  the  rent  at  the  current  rate 
of  interest. 

But  the  entrepreneur  is  in  a  different  position. 
He  assumes  the  management  and  takes  the  risk  of 
the  land  just  as  he  does  of  the  capital  he  uses.  If  he 
considers  it  profitable  to  employ  new  capital  onl}^ 
when  he  can  make  double  the  current  rate  of  inter- 
est upon  it,  and  therefore  considers  it  possible  to 
allow  only  half  his  necessary  profits  as  payments  for 
interest,  he  will  also  consider  land  (and  other  op- 
portunities for  emplo3''ment)  as  worth  to  him  such 
a  capitalisation  as  would  make  the  actual  return 
yielded  by  it  equal  to  the  rate  which  he  gains  on  his 
new  capital,  and  would  therefore  allow  only  half  his 


244  THE  DISTRIBUTION  OF  WEALTH  chap. 

surplus  as  his  possible  paj-ments  for  rent.  Hence  he 
capitalises  his  surplus  at  double  the  I'ate  of  interest, 
or,  what  is  the  same  thing,  he  retains  for  himself  as 
his  necessary  profits,  one  half  the  surplus,  paying  the 
other  half  over  to  the  landowner,  who  then  capital- 
ises it  at  the  current  rate. 

Applying  this  principle,  then,  to  the  surplus  in 
question,  $2.75,  and  capitalising  it  at  12%,  we  find 
the  estimated  value  of  the  land  to  be  $22.92. 

If  Ave  turn,  now,  to  the  other  tracts  of  wheat  land 
jjresented  in  the  table,  we  find  that  the  tract  in 
northern  Ohio  differs  from  that  in  eastern  Ohio  in 
two  particulars:  1.  Superior  natural  fertility,  as 
shown  by  the  fact  that  it  does  not  require  outlays 
for  fertilisers,  and  that  its  yield  is  nevertheless  50% 
greater.  2.  A  higher  current  rate  of  interest.  Ap- 
plying the  same  principles  as  in  the  case  of  the  first 
tract,  finding  that  the  annual  expenditure  is  $10.18, 
we  see  that  the  necessary  return  on  this  account  is 
$11.(30,  but  that  the  value  of  tlie  total  product  is 
$27.00.  This  leaves  a  surplus  of  $15.40,  which, 
capitalised  at  11%,  gives  the  estimated  value  of  the 
land  as  $110.00. 

The  third  and  fourth  tracts  are  alike  in  respect  to 
the  rates  of  interest,  and  do  not  differ  materially 
between  themselves  in  other  points.  Capitalisation 
here  takes  place  at  the  rate  of  20%,  and  consequently 
the  estimated  values  of  the  land  are  much  lower  than 
they  would  have  been  in  Ohio  with  the  same  sur- 
pluses. 


V  STATISTICAL   DATA  245 

I  have  added  in  each  case  the  actual  value  of  the 
land  and  improvements  according  to  the  estimates  of 
each  neighbourhood.  It  will  be  seen  that  the  esti- 
mated value  according  to  the  above  calculation  in  no 
case  agrees  exactly  with  the  true  value.  Yet  when 
it  is  considered  what  a  leverage  is  involved  in  the 
processes  of  capitalisation  here  employed,  the  ten- 
dency to  agreement  will  appear  remarkable.  For 
example,  a  lowering  of  the  product  in  Column  III.  by 
1.46  bushels  per  acre  would  bring  the  capitalisation 
down  to  the  actual  value,  and  in  Column  II.  an  ad- 
dition of  1^  bushels,  or  a  rise  in  the  price  of  4|  cents 
per  bushel,  would  make  the  estimated  value  equal  to 
the  true  value. 

But  while  there  may  be  many  explanations  of  the 
discrepancies  in  particular  cases,  there  is  another  ele- 
ment which  will  account  for  the  widest  differences, 
namely,  the  entrepreneur's  personal  and  temporary 
profits.  This  element  is  plainly  illustrated  in 
Column  v.,  the  cultiv^ation  of  cabbages.  Instead 
of  investing  annually  110.00  or  $12.00  in  the 
growing  of  wheat  or  staple  grains,  the  entrepre- 
neur here  invests  -$35.25  per  acre.  Such  culture 
demands  greater  personal  attention  and  involves 
greater  risks,  but  if  successful  yields  much  greater 
returns.  The  profit  in  this  case  is  337%  of  the 
investment.  But  the  expense  of  the  original  invest- 
ment and  customary  profits  on  the  same  necessitates 
only  $39.48.  The  total  return  is  $160.00,  which 
leaves   $120.52   for   rent   and   personal   profits.      If 


246  THE  DISTRIBUTION   OF  WEALTH  chap. 

this  were  a  permanent  profit  it  would  show  itself  in 
a  capitalisation  of  the  monopoly  equal  to  $1004.00 
per  acre.  But  it  is  temporary  and  fluctuating,  and 
depends  upon  the  abilities  of  the  individual  who 
happens  to  be  in  charge.  The  necessary  profits  on 
the  actual  value  of  the  land  and  improvements  as 
determined  by  the  competition  of  the  least  prosper- 
ous entrepreneurs  of  the  neighbourhood  who  perma- 
nently sustain  themselves,  is  only  $10.20.  This 
leaves  a  remainder  of  $110.32  pure  personal  profits 
of  the  entrepreneur. 

Applying  this  principle  to  the  wheat  lands,  I  have 
indicated  under  items  9  and  10  the  necessary  profits 
on  the  true  value  of  land  and  improvements  deter- 
mined as  above,  and  the  personal  profits  (or  loss)  of 
entrepreneurs.  Of  course,  in  all  these  cases  allow- 
ances must  be  made  for  the  statistical  difficulties 
already  mentioned.  It  would  be  interesting  to  ex- 
tend this  line  of  inquiry  into  other  branches  of  agri- 
culture and  other  industries.  But  scarcely  more 
can  be  claimed  for  it  than  the  indication  of  tenden- 
cies which  are  already  self-evident  when  once  they 
are  pointed  out.  Specially  valuable  results  could  be 
obtained  by  comparing  wheat-growing  in  England 
with  the  American  tables  here  given.  It  would  then 
doubtless  appear  that  the  high  values  of  English 
farming  lands  are  due  not  only  to  larger  crops  and 
higher  prices,  which  result  from  higher  agricultural 
skill  and  nearness  to  markets,  but  also  to  the  more 
intensive  cultivation  and  extensive  use  of  fertilisers, 


STATISTICAL  DATA 


247 


an  1  lower  expenses  of  production,  which  follow  from 
the  lower  rates  of  wages  and  interest. 

Another  example  is  given  below  ^  showing  the  way 
in  which  the  permanent   monopoly  element  absorbs 

Pricks  of  Limber  and  Stumpage  i\  Michigan,  1866-1887. 


Datk. 

Lumber  pkk 

1000  Fekt. 

Stumpage  per 

1000  Feet. 

18G0 

$11.50  to  .i)12.00 

§1.00  to 

81.25 

1867 

12.00  " 

12.50 

1.25  " 

1.50 

1868 

12.00  " 

12.50 

1.50  " 

1.75 

1869 

12.50  " 

13.00 

2.00  " 

2.50 

1870 

12.00  " 

12.50 

2.00  " 

2.50 

1871 

12.50  " 

13.00 

2.00  " 

2.50 

1872 

13.00  " 

13.50 

2.00  '• 

2.50 

1873 

11.50  " 

12.00 

2.00  " 

2.50 

1874 

10.50  " 

11.00 

2.00  " 

2.50 

1875 

9.50  •• 

10.00 

2.25  " 

2.75 

187G 

9.00  " 

9.50 

2.25  " 

2.75 

1877 

9.25  " 

9.75 

2.25  " 

2.75 

1878 

9.50  " 

10.00 

2.25  '• 

2.75 

1879 

10.50  " 

11.00 

2.50  " 

3.35 

1880 

11.50  " 

12.00 

2.75  " 

3.00 

1881 

12..30  '' 

13.00 

3.00  " 

4.00 

1882 

14.00  - 

14.50 

3.50  " 

4.50 

1883 

13.50  " 

14.00 

4.00  " 

5.00 

1884 

12.50  •'■ 

13.00 

4.00  •' 

5.00 

1885 

12.50  " 

13.00 

4.50  " 

6.50 

1880 

12.50  " 

13.00 

4.50  " 

6.50 

1887 

12.50  " 

13.00 

4.50  " 

6.50 

the  advantages  wdiich  accrue  from  progress  and  the 
lowering  of  wages  and  interest.  The  prices  of  pine 
lumber  in   Michigan   have   remained   at   about   the 


1  See  also  Quarterly  Journal  of  Economics,  July,  1892. 


248  THE  DISTRIBUTION  OF  WEALTH        chap,  v 

same  figure,  $11.50  to  $13.00  per  1000  feet,  during 
the  twenty -two  years  covered  by  the  table;  but 
meanwhile  the  prices  of  the  same  lumber  while  yet 
standing  in  the  forests  (stumpage),  before  capital  and 
labour  have  been  applied  to  it,  have  risen  from  $1.00 
and  11.25  to  $4.00  and  $6.50  per  1000  feet.  This  shows 
that  capital  and  labour  receive  a  progressively  less 
share  of  their  total  product,  and  accounts  in  part  for 
the  lowering  of  wages  and  interest.  Of  course,  there 
has  been,  also,  an  enormous  increase  in  the  efficiency 
of  both.  Yet  in  the  case  of  capital  this  increased 
efficiency  has  been  accompanied  by  a  greatly  in- 
creased quantity  of  capital  emplo3^ed,  so  that  the 
rate  of  interest  has  been  lowered.  Conversely,  this 
lowering  of  the  rate  has  sent  up  the  capitalisation  of 
the  land  in  a  geometric  progression  from  $10.00  and 
$12.00  per  acre  when  the  values  of  the  low-priced 
stumpage  was  capitalised  at  89^  and  10%,  to  $100.00 
and  $125.00  per  acre,  when  the  value  of  the  high- 
priced  stumpage  is  capitalised  at  5%  and  6^^. 


CHAPTER   VI 

CONCLUSION 

The  so-called  conflict  between  capital  and  labour 
is  at  bottom  a  conflict  between  capital  and  labour 
on  the  one  hand,  and  the  owners  of  opportunities  on 
the  other.  Capital  is  not  the  residual  claimant  of 
the  current  product  of  industry,  seeing  that  the 
rates  of  interest  are  steadily  declining.  Neither  is 
labour  the  residual  claimant.  This  view  of  President 
Walker's  overlooks  the  phenomena  of  necessary  and 
permanent  profits,  and  gives  attention  only  to  the 
temporary  or  personal  profits.  Necessary  profits 
in  the  first  place  do  away  with  the  no-profits  entre- 
preneur. But  necessary  profits  may  be  looked  upon 
as  a  kind  of  wages  and  interest.  Personal  profits 
are  the  residual  or  contingent  share  of  the  entre- 
preneur proper  in  any  single  round  of  production, 
and  as  its  amount  depends  so  largely  upon  the 
personal  abilities  of  the  entrepreneur  it  may  well 
be  considered  as  following  a  law  similar  to  that 
of  rent.  In  such  case  one  may  truly  say  that  it 
does  not  enter  into  the  price  of  products  nor  does 
it  come  out  of  wages ;  but  it  is  a  surplus  above 
the   production    of    the    "  no-profits "    entrepreneur 

249 


250  THE  DISTRIBUTION  OF   WEALTH  chap. 

who  pays  the  same  wages  and  interest.  Hence 
the  competition  of  entrepreneurs  by  driving  out  the 
lowest  would  raise  the  margin  of  entrepreneurs ; 
the  profits  of  others  would  be  lowered  and  the 
gain  from  the  general  increasing  efficiency  and  pro- 
ductivity of  labour,  being  a  gain  which  takes  place 
under  the  "no-profits  "  entrepreneur  as  well  as  under 
others,  would  gradually  be  transferred  to  the  labour- 
ing classes. 

It  is  admitted  by  President  Walker,  and  indeed  is 
essential  to  his  theory,  that  the  individual  entre- 
preneur is  the  residual  claimant  "in  any  individual 
transaction,  .  .  .  owing  to  the  force  of  contract,  just 
as  the  farmer,  under  a  lease,  pays  the  owner  of  the 
soil  no  more  in  years  when  the  yield  is  exceptionally 
large,  and  no  less  in  years  when  the  crops  are 
short."  ^  But  these  are  temporary  and  fluctuating 
profits,  and  cannot  be  capitalised.  If  the  profits  in 
the  case  cited  should  turn  out  to  be  permanently 
"exceptionally  lai'ge,"  we  should  find  that  at  the 
expiration  of  the  lease  another  would  be  drawn  up, 
in  which  these  permanent  profits  would  be  handed 
over  to  the  owner  of  the  soil  in  the  form  of  increased 
rent.  And  so,  not  only  do  capital  and  labour  not 
get  the  gain  from  permanently  increased  produc- 
tivity, but  even  the  entrepreneur  proper  himself  fails 
to  get  it.  He  merely  takes  his  chances  of  having 
good  luck  and  better  ability  than  his  competitors  in 
getting  a  temporary  residual   share  above  his  costs 

1  Political  Economy,  p.  249. 


VI  CONCLUSION  251 

for  labour  and  capital  and  permanent  monopoly 
profits. 

President  Walker  seems  also  to  overlook  the 
element  of  manufacturing  and  mercantile  rents.  He 
holds  1  that  increased  productivity  of  labourers  would 
not  go  to  tlie  landlord  class  in  higher  rents,  unless 
it  would  involve  an  increase  in  the  amount  of  material 
employed.  In  this  case  "the  increase  would  no  longer 
go  entire  to  re-enforce  wao'es.  A  largfer  amount 
of  materials  being  used,  a  greater  demand  would  be 
made  thereby  upon  the  productive  powers  of  the 
soil ;  the  lower  limit  of  cultivation  would  be  pushed 
downwards,  a  longer  or  shorter  distance,  to  supply 
the  increased  demand ;  and  rent  would  be  enhanced." 
This  indeed  accounts  for  the  disposal  of  one  part  of 
permanent  profits.  Mining  and  timber  rents  take  a 
large  share  from  the  product  of  capital  and  labour. 
But  agricultural  rents  get  a  very  small  part,  while 
rents  paid  for  manufacturing  and  mercantile  sites 
fjet  an  increasinof  share. 

Taking  together  all  the  different  kinds  of  permanent 
profits  and  rents,  we  can  see  that  they  are  sufficiently 
able  to  rise  up  and  absorb  all  tlie  increasing  produc- 
tion of  capital  and  labour  and  business  ability,  where 
this  is  diffused  so  as  to  reach  the  lowest  grades  of 
capital,  labourers,  and  entrepreneurs.  Tracing  a 
single  product  like  furniture,  in  its  transformation 
from  the  forest  to  the  consumer,  and  noticing  the 
different    permanent   monopoly    charges    which   are 

1  Politiral  EcoJiomy,  pp.  254,  25G. 


252  THE   DISTRIBUTION   OF  WEALTH  chap. 

successively  deducted,  it  is  easy  enough  to  see  where 
the  residual  claimants  lie.  First  the  stumpage 
owners,  then  the  transpoi'tation  profits ;  profits  on 
patent  rights,  which  are  said  to  cover  five  sixths  of 
the  manufacturing  industries  of  the  country  ;  ground 
rents  paid  for  mill  sites,  operatives'  dwellings,  com- 
pany's offices ;  the  profits  and  rents  absorbed  by  the 
agencies  of  exchange,  such  as  bankers  and  boards  of 
trade ;  and  finally,  whatever  permanent  monopolies 
may  have  been  developed  in  the  form  of  trusts  by 
manufacturers,  dealers,  and  middlemen.  To  these 
should  be  added  the  rents  and  monopoly  profits  of 
collateral  industries  furnishing  coal  and  iron  for 
manufactures. 

The  prime  importance  of  monopoly  privileges  in 
the  distribution  of  wealth  is  well  shown  by  the  results 
of  the  investigation  of  the  New  York  Tribune  ^  in  its 
efforts  to  ascertain  the  sources  of  the  fortunes  of  the 
millionnaires  of  the  United  States.  That  investiga- 
tion was  undertaken  to  show  that  the  system  of  pro- 
tection has  not  been  the  main  cause  for  monopolies 
and  great  fortunes.  The  investigation  amply  de- 
monstrates this  proposition.  Of  the  4047  million- 
naires reported,  only  1125,  or  28%,  obtained  their 
fortunes  in  protected  industries.  The  following 
partly  estimated  summaries  are  given,  based  on  the 
Tribune  report.  They  show  that  about  78%  of 
the  fortunes  were  derived  from  permanent  monop- 
oly  privileges,    and    only    21.4%    from   competitive 

i  Published  in  June,  1892. 


VI  CONCLUSION  253 

industries  unaided  by  natural  and  artiticial  monopo- 
lies. Yet  there  can  be  no  question  that  if  this 
21.4  %  were  fully  anal3sed,  it  would  appear  that 
they  were  not  due  solely  to  personal  abilities  un- 
aided by  these  permanent  monopoly  privileges. 
They  were  mostly  obtained  from  manufactures,  and 
five  sixths  of  the  manufactui'es  of  the  country  are 
based  on  patents.  Besides,  fortunate  investments 
in  real  estate,  stocks,  etc.,  have  often  contributed 
to  fortunes  where  they  do  not  appear  prominently. 
Furthermore,  if  the  ^Ize  of  fortunes  is  taken  into 
account,  it  will  be  found  that  perhaps  95%  of  the  total 
values  represented  by  these  millionnaire  fortunes  is 
due  to  those  investments  classed  as  land  values  and 
natural  monopolies,  and  to  competitive  industries 
aided  by  such  monopolies. 


Summary  of  the  Sources  of  the  Fortunes  of  American 

MiLLIONNAIRES. 

Grand  total 4047 

Origin  of  fortune  unknown  ....  55 

3992 
In  protected  industries  mainly  .     .     .      1125  =  28.1% 

Pkr  Cext. 

Land  values 981  ..     .  24.6 

Natural  monopolies      ....  380  ...  9.7 

Artificial  monopolies  ....  124  ...  3.1 
Competitive  industries  aided  by 

natural  monopolies  .  .  .  1G47  .  .  .  41.5 
Competitive  industries  unaided 

by  natural  monopolies   .     .  854  .     .     .  21.4 

3992  .     .     .  100.0 


254                 THE  DISTRIBUTION   OF  WEALTH  chap. 

Land  Values. 

Protected  natural  resources  are  marked  P. 

Saw  mills  and  lumber 138  P 

Coal,  iron,  zinc,  lead,  copper,  and  quicksilver  mines  .     .     .  113  P 

Marble  quarries 2  P 

Sugar  plantations ■ 3  P 

Tobacco  growing  and  lands 3 

Wool  growing  and  lands IP 

Cattle  raising  and  lands 47 

Real  estate,  advance  in  values 468 

Silver  and  gold  mines 73 

Oil  producing,  refining,  and  transportation    .....  72 

Pine  lands 19  P 

Dealing  in  timber  and  mineral  lands 11 

Plantations,  farming,  and  land 15 

Nitrate  beds  in  Chili 1 

Asphalt  street  pavements 1 

Plantations,  West  Indies  and  South  America 6 

Phosphate  land  in  Florida 1 

Stock  raising  and  lands 3 

Cotton  raising 4 

981 
Distributive  Industries,  Natural  Monopolies. 

Railroads 186 

Express 18 

Telegraph  and  telephone 12 

Gas,  waterworks,  street  railways,  ferries 70 

Contracting  and  building  railways,  streets,  and  public  works 

generally 77 

Contracting  for  railways  in  foreign  lands 6 

Grain  elevators,  storage  warehouses,  and  wharf  business    .  17 

386 
Banking,  Loaning  Money. 

Loaning  money  and  real  estate 9 

Banking,  real  estate,  and  securities 204 

303 


CONCLUSION  255 


Artificiaf,  Monopolies. 

Patented  and  proprietary  articles 93 

Copyright  books,  with  general  printing  in  some  cases     .     .  25 

Copyright  music 2 

Mail  contracts 1 

Royalties  on  patents 3 

124 

Competitive  Indpstuies  aided  by  Xatpkal  Monopolies, 
Land  Values,  and  Clkkency. 

Manufacturing,  with  real  estate,  banking,  and  other  non- 
protected business,  in  many  cases 619 

Brewing  and  real  estate 79 

Merchandising  mainly,  with,  in  a  great  majority  of  cases, 

investments  in  real  estate,  banks,  and  securities  .     .     .  986 

Loaning  monej'  and  real  estate 9 

Banking,  real  estate,  and  secui'ities 294 

Brokerage  business  and  stocks 56 

Law  practice,  real  estate,  and  securities 65 

Hotel  and  restaurant,  with  real  estate 24 

Show  and  circus,  with  real  estate,  securities 3 

Medical  practice  and  real  estate 1 

Pawnbroking  and  real  estate 2 

Pony  express  and  lands 1 

Mercantile  agency  and  investments 2 

2141 

From  these  should  be  deducted  a  minority  of  the 
•     619  manufacturers,  who  were  probably  unaided 

by  monopolies,  say 200 1 

Also  from  986  merchants,  for  the  same  reason,  sav,      300  ^ 

500 

1641 
Miscellaneous  investments,  mostly  protected 6 

6147 

1  See  p.  256,  where  these  figures  are  incorporated  in  the  table  of 
"  Competitive  Industries  unaided  by  Monopolies." 


256  THE  DISTRIBUTION  OF   WEALTH 


Competitive  Industries  unaided  by  Natural  and 
Artii'icial  Monopolies. 

[P,  protected.  In  many  cases,  however,  fortunes  built  up  on  secret  rebates  from 
railwa3's.  Such  supposed  cases  marked  R.  Those  marked  ?  may  possibly  be 
connected  with  natural  monopniics,  e.g.  wharves,  docks,  mines.] 

Distilling,  mainly 32  P 

Malting 2P 

Sugar  refining,  mainly 29  P 

Ship-building  and  repairing 3 

Tanning  and  leather 49  P 

Coasting  and  lake  shipping 31 

Flour  milling 16  R 

Seeds  and  nursery  business,  mainly 4 

Lithographing  and  insurance 1 

Ocean  shipping  and  foreign  trade 75  ? 

Whaling  and  ocean  trade 4 

Packing  and  provisions 34  R 

Ice  business 1 

Publishing  news  and  story  papers 30 

Steamboating  on  rivers  and  harbours 20  ? 

Cracker  and  bread  baking 4 

Louisiana  lottery 2 

Smelting  and  refining  metals 6  ? 

Insurance  business,  mainly 6 

Pension  agency 1 

Unprotected  manufacturing 2 

Refining  lard,  cotton  oil,  etc 1 

Tweed  ring 1 

354 

To  these  should   be  added   a  portion   of   the   619 

protected  manufacturers,  say 200  i 

Also  a  portion  of  the  986  merchants 300  ^ 

500 

854 

In  examining  the  foregoing  tables  and  in  the  gen- 
eral statistical   investigations    concerning  the  distri- 

1  See  p.  255. 


VI  CONCLUSION  2S1 

bution  of  wealth,  it  should  be  borne  in  mind  that  the 
true  income  from  monopoly  privileges  is  always  more 
or  less  concealed,  either  designedly  or  inevitably. 
This  is  brought  about  by  increasing  in  the  pretended 
form  of  expenses  the  shares  of  certain  factors  in  pro- 
duction, when  such  increase,  rightly  examined,  is 
found  to  be  due  to  special  favours  or  contracts  grow- 
ing out  of  the  control  of  the  monopoly  privileges. 
Among  these  ways  in  which  profits  are  concealed, 
may  be  mentioned  high  salaries ;  favourable  contracts 
with  inside  corporations  and  individuals,  imposing 
heavy  fixed  charges  and  operating  expenses;  ficti- 
tious debts ;  and  the  tendency  to  keep  up  the  capi- 
talisation of  original  improvements  and  investments 
without  making  those  allowances  for  depreciation 
which  would  be  allowed  in  competitive  enterprises.^ 

The  principles  developed  in  the  foregoing  pages 
have  important  bearings  on  the  questions  of  wages, 

1  In  a  valuable  letter  received  by  the  writer  from  Mr.  F.  C. 
Waite,  special  agent  of  the  Eleventli  Census  in  charge  of  "True 
Wealth,"  the  statement  is  made  that  "the  monopolistic  value  of 
land  in  the  United  States,  i.e.  the  'unearned  increment,'  equalled 
m  1890  about  $25,000,000,000."  This  is  to  be  compared  with  a 
total  wealth  of  the  country,  as  estimated  in  Bulletin  92  of  the  Cen- 
sus Bureau,  of  §63,(348,000,000.  "This  enormous  land  value," 
says  Mr.  Waite,  "is  lai-gely  made  up  of  inflation,  resulting  from 
the  fact  that  owners  and  buyers  expect  to  continue  piling  increase 
upon  increase  year  after  year.  In  some  sections  almost  every  dol- 
lar of  these  inflated  values  is  liable  to  vanish  when  the  great  com- 
mercial crisis,  now  brewing,  sweeps  across  our  continent,  and  the 
resulting  foreclosures  i*educe  the  amount  of  mortgaged  indebted- 
ness in  this  country  to  somewhat  the  same  status  as  existed  in 
1880."  Regarding  the  other  monopoly  privileges  it  is  possible  to 
give  only  the  gross  and  net  earnings  without  an  attempt  at  capital- 


25S 


THE  DISTRIBUTION   OF  WEALTH       chap,  vi 


taxation,  and  public  policy,  wliich  can  only  be  sug- 
gested but  not  elaborated  in  this  essay.  An  increase 
of  wages  without  increased  efficiency  would  come  not 
from  interest  nor  from  necessary  and  personal  profits 
but  from  permanent  profits.  Tax  reform  sliould  seek 
to  remove  all  burdens  from  capital  and  labour  and 
impose  them  on  monopolies.  Public  policy  should 
leave  capital  and  labour  and  business  ability  free  and 
untrammelled,  but  endeavour  to  widen  and  enlarge 
the   opportunities  for  their  employment. 

ising  the  monopoly  element.  Mr.  Waits  furnishes  the  followmg 
table :  — 

Gross  and  Net  Earnings  of  Important  Natural  Monopolies 
FOR  THE  Census  Year  1890. 


Railroads  : 

From  operation  .... 

From  other  sources 

Unreported  roads  (about) 
Express  companies     .... 

Street  railways 

Water  transportation  .  .  . 
Telegraph  companies  .... 
Telephone  companies  .  .  . 
Insurance  companies : 

Life 

Fire,  etc 

Banks : 

National 

All  others  (estimated) 
Artificial  gas  companies  (esti- 
mated)       


Gi'.oss  Earnings. 


$1,051,877,632 
126,767,00-4 
50,000,000 
53,000,000 
90,000,000 
191,000,000 
25,000,000 
10,401,583 

90,000,000 
54,9S)1,013 

144,614,053 
200,000,000 

25,000,000 


Net  Eaknings. 


$331,373,057 

11,000,000 
28,000,000 

3i,oo;),ooo 

7,000,000 
5,200,712 

59,000,0001 
19,000,000 

72,055,564 


'  Gross  receipts  less  gross  disbursoiiicnts. 


The  American  Commonwealth. 

By  the  Right  Hon.  JAMES  BRYCE,  D.C.L., 

Author  of  "  77ie  Holy  Roman  Empire  "/  i\/.P.  for  Aberdeen. 

In  Two  Volumes,  Large  lamo.      Third  Edition,  Revised  Throughout. 

Vol.   I.   $1.75.     Now  Ready.  Vol.11.     In  the  Prt-ss. 

"  Written  with  full  knowledge  by  a  distinguished  Englishman  to  dispel  vulgar  prejudices 
and  to  help  kindred  people  to  understand  each  other  better,  Professor  liryce's  work  is  in  a 
sense  an  embassy  of  peace,  a  message  of  good-will  from  one  nation  to  another."  —  T/te  'J'imes, 
London. 

"  This  work  will  be  invaluable  ...  to  the  American  citizen  who  wishes  something  more 
than  a  superficial  knowledge  of  the  political  system  under  which  he  lives  and  of  the  differences 
between  it  and  those  of  other  countries.  .  .  .  The  fict  is  that  no  writer  has  ever  attempted 
to  present  so  comprehensive  an  account  of  our  political  system,  founded  upon  such  length  of 
observation,  enriched  with  so  great  a  mass  of  detail,  and  so  thoroughly  practical  in  its  charac- 
ter. .  .  .  We  have  here  a  storehouse  of  political  information  regarding  America  such  as  no 
other  writer,  American  or  other,  has  ever  provided  in  one  work.  .  .  .  It  will  remain  a  stan- 
dard even  for  the  American  reader."  —  New  York  Tribune. 

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try. ...  It  is  by  far  the  most  able,  sincere,  candid,  and  impartial  study  of  the  condition  of 
the  United  States  that  has  ever  appeared  since  De  Tocqueville's  memorable  work."  —  Boston 
Beacon. 

"  This  general  outline  of  Mr.  Bryce's  most  important  book  is  given  in  the  hope  that  it  may 
help  create  the  conviction  that  no  earnest  and  intelligent  American  can  afford  to  remain 
ignorant  of  it.  His  education  will  be  incomplete,  as  a  preparation  for  his  duties  as  a  citizen, 
if  he  does  not  take  advantage  of  the  helps  to  a  sound  judgment  and  a  noble  purpose  which 
are  here  given."  —  jV.  V,  Ez'eni)ig  Post. 


WORKS  BY  THE  SAME  AUTHOR. 

THE   HOLY  ROMAN  EMPIRE.       Eighth   Edition,   revised  and 

enlarged.     Crown  8vo.     $1.00.     Library  Edition.      8vo.     $3.50. 

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who  has  so  thoroughly  grasped  the  real  nature  of  the  mediaeval  empire,  and  its  relations  alike 
to  earlier  and  later  times." 

TRANSCAUCASIA  AND  ARARAT.  Being  Notes  of  a  Vaca- 
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Third  Edition.     Crown  8vo.      $2.50. 

The  Times  says:  "  He  has  produced  a  very  interesting  volume,  full  of  information.  .  .  . 
In  Professor  Bryce's  bold  ascent  of  Ararat  alone,  when  Kurds  and  Cossacks  alike  deserted 
him,  we  have  a  feat  of  mountain  climbing  which  in  itself  proves  him  to  be  no  unworthy 
member  of  the  Alpine  Club.  This  alone  would  render  the  book  well  worth  reading,  quite 
apart  from  the  stoie  of  information  ctmtained  in  it." 

SOCIAL  INSTITUTIONS  OF  THE  UNITED  STATES.  Re- 
printed from  "  The  American  Commonwealth."      i2mo.     Cloth.     $1.00. 


MACMILLAN  &  CO., 

66   FIFTH   AVENUE,    NEW  YORK. 
1 


THE  UNITED  STATES. 

An   Outline  of   Political    History,   1492-1871. 

By    GOLDWIN    SMITH,    D.C.L. 
12nio,  cloth,  price  $3.00. 

"Considered  as  a  literary  composition,  the  work  can  scarcely  be  too  highly 
praised.  It  is  a  marvel  of  condensation  and  lucidity.  In  no  other  book  is  the 
same  field  covered  so  succinctly  and  so  well.  .  .  .  Almost  every  page  is  enriched 
with  striking  comments  that  cause  the  reader  to  carefully  reconsider,  if  not  to 
change,  his  views  of  many  historical  persons  and  events."  —  The  New  York  Sun. 

"The  opinions  advanced  by  Professor  Smith  are  ...  in  the  main  in  harmony 
with  those  of  our  best  authorities,  and  the  treatise  as  a  whole  has  a  comprehen- 
siveness of  view  and  a  ready  grasp  of  leading  tendencies  that  should  make  it  par- 
ticularly useful  to  the  busy  man  who  desires  a  rapid  survey  of  American  political 
historv.  By  deliberately  neglecting  details  Professor  Smith  has  been  able  to  fasten 
attention  upon  salient  points  and  to  concentrate  interest  around  the  careers  of  the 
great  leaders  in  our  jjolilical  development.  ...  It  is  safe  to  assert  that  Americans 
as  well  as  Englishmen  will  welcome  Professor  Smith's  book  and  rejoice  in  its  note- 
worthy fairness  and  lucidity."  —  The  Beacon. 

"  The  history  of  the  United  States  is  now  told  for  us  in  the  more  attractive  form 
and  with  all  the  advantages  of  the  marvellous  power  of  condensation  and  the  brill- 
iance and  picturesqueness  of  style  which  characterize  Mr.  Goldwin  Smith's  writ- 
ing. The  pages  are  filled  with  sentences  which  stimulate  thought,  with  happy 
phrases,  with  vivid  pictures  of  men  and  of  situations  drawn  with  a  few  bold 
strokes.  ...  A  volume  of  absorbing  interest,  worthy  to  be  ranked  with  the  best 
work  of  a  great  master  of  the  English  language."  —  The  Toronto  Globe. 

"  The  work  is  written  in  an  exceedingly  pleasant  style ;  simple,  unaffected,  and 
always  lucid.  One  who  begins  to  read  is  certain  to  continue,  for  very  pleasure  at 
the  ease  of  the  narrative,  and  its  condensed  comprehension." 

"  The  author  has,  as  those  who  know  him  do  not  need  to  be  told,  a  style  which 
is  nothing  less  than  fascinating,  and  a  delightful  literary  flavor  pervades  all  his 
work.  The  book  is,  of  course,  a  marvel  of  condensation.  Considered  merely  as  a 
literary  composition  it  would  command  high  praise.  Its  lucidity,  its  graphic  narra- 
tion, and  its  constant  avoidance  of  even  an  approach  to  dullness  are  quite  as 
remarkable  as  its  incisiveness  of  judgment  and  originality  of  view.  ...  As  a 
whole  the  book  is  remarkably  free  from  errors."  —  The  Providence  Sunday  yournal. 

"  The  book  is  a  solid  addition  to  the  literature  of  American  history,  and  espe- 
cially gives  a  presentation  of  the  '  revolutionary  and  reconstruction  '  periods  of  our 
national  life,  that  will  be  perused  with  deep  interest.  It  is  finely  adapted,  by  its 
method  of  treatment  and  the  literary  finish  of  the  writing,  to  excite  the  attention 
of  English  readers  and  to  furnish  them  with  sound  views  of  American  history." 
—  jVew  York  Obsct~jer. 

"  Professor  Smith  has  tried  to  be  fair  in  his  dealings  with  people  and  events,  and 
he  has  presented  in  the  main  a  very  clear  picture  of  the  influences  that  have 
brought  the  political  life  of  the  nation  to  its  present  status.  The  style  is  lucid  and 
pleasant."  —  The  Toledo  Blade. 


MACMILLAN   &   CO., 

66    FIFTH   AVENUE,    NEAV   YORK. 
2 


Macmillan  &  Co.'S 

LIST    OF    BOOKS 

ON 

HISTORY  i^'  POLITICAL  ECONOMY. 


ABDY  (Judge). — Feudalism  :  a  Series  of  Lectures  delivered  at  Gresham  College. 
By  J.  T.  Abdy,  LL.D.     121110.     32.00. 

ADAMS  and  CUNNINGHAM.— The  Swiss  Confederation.  With  Map.  8vo.  $4.00. 

ANSON.  — Works  by  Sir  William  R.  Anson,  D.C.L. 

The  Law  and  Custom  of  the  Constitution.     Clarendon  Press  Series. 
Part  L     Parliament.     8vo.     $2.75. 
Part  IL     The  Crown.     8vo.     $3.50. 
Principles  of  English  Law  of  Contract,  and  of  Agency  in  its  Relation  to 
Contract.     Fifth  Edition,  revised.     Clarendon  Press  Series.     8vo.     $2.60. 

ARISTOTLE.      On  the  Athenian  Constitution.      Translated,  with  Introduction 
and  Notes,  by  F.  G.  Kenyon,  M.A.,  Fellow  of  Magdalen  College,  Oxford. 
On  handmade  paper,  bound  in  buckram.     Post  8vo.     ^i-^o- 
Large-paper  Edition.     Large  12010.    ^S-^S- 

BAST  ABLE.  —  Public  Finance.  By  C.  F.  Bastable,  Professor  of  Political  Econ- 
omy at  Trinity  College,  Dublin.     8vo.     ^4.00. 

"  His  treatise  on  I^inance  is  exhaustive  and  far-reaching.  .  .  .  As  a  thorough  statement 
of  the  theories  of  the  English  school  of  finance,  there  has  been  no  manual  recently  published 
that  approaches  Dr.  Bastable's  in  precision  of  definition  or  order  of  arrangement." — Com- 
}>iercial  Bulletin. 

BEDE'S  (Venerable)  Ecclesiastical  History  of  England.  Together  with  the 
Anglo-Saxon  Chronicle.  With  Illustrative  iXotcs,  a  Short  Life  of  Bede, 
Analysis  of  the  History,  and  an  Index  and  a  Map  of  Anglo-Saxon  England. 
Edited  by  J.  A.  GILES,  D.C.L.     $1.50. 

BENTHAM. — An  Introduction  to  the  Principles  of   Morals  and  Legislation. 

Clarendon  Press  Series.     $1.7^- 
A  Fragment  on  Government.     By  Jeremy  Bentham.    Edited,  with  an  Intro- 
duction, by  F.  C.  MoN  lAGUR,  M.A.,  Late  Fellow  of  Oriel  College.   8vo.   $2.00. 

BERNARD   (M.).  —  Four  Lectures   on   Subjects  Connected  with    Diplomacy. 

Bvo.     $2.50. 

BIRKBECK  (W.  L.).  — Historical  Sketch  of  the  Distribution  of  Land  in  Eng- 
land.    $i.S°- 

3 


BLAIR'S  Chronological  Tables,  Revised  and  Enlarged.  Comprehending  the 
Chronology  and  History  of  the  World,  from  the  Earliest  Times  to  the  Russian 
Treaty  of  Peace,  April,  1856.  By  J.  Willoughby  Ross.  ^3.50. 
Index  of  Dates.  Comprehending  the  Principal  Facts  in  the  Chronology  and 
History  of  the  World,  from  the  Earliest  to  the  Present  Time,  alphabetically 
arranged  ;  being  a  complete  Inde^  to  Bohn's  enlarged  Edition  of  Blair's 
Chronological  Tables.     By  J.  W.  ROSSE.     2  vols.     Each  gi.50. 

BLUNTSCHLI  (B.  H.).  — The  Theory  of  the  State.  English  Translation  by 
R.  Lodge,  M.A.    New  Edition.     ^3.00. 

BOHM-BAWERK.  —  Capital  and  Interest.  A  Critical  History  of  Economical 
Theory.  By  EU(;en  V.  BoHM-Bawerk,  Professor  of  Political  Economy  in 
the  University  of  Innsbruck.  Translated,  with  a  Preface  and  Analysis,  by 
William  Smart,  Lecturer  on  Political  Economy  in  Queen  Margaret  College, 
Glasgow.    8vo.    ^4.00. 

"  We  have  read  the  volume  with  increasing  interest  from  the  first  page  to  the  last.  Although 
it  consists  almost  wholly  of  destructive  criticism,  it  is  very  necessary  work.  We  recall 
nothing  of  the  kind  equal  to  it.  Even  though  he  may  not  have  said  the  last  word  on  the  par- 
ticular subject  of  his  inquiry,  he  has  said  enough  to  fix  his  place  in  the  front  rank  of  the  world's 
economists."  —  Evening  Post. 

The  Positive  Theory  of  Capital.  By  Eugen  V.  Bohm-Bawerk,  author  of 
"  Capital  and  Interest,"  etc.  Translated  by  William  Smart,  Lecturer  on 
Political  Economy  in  Queen  Margaret  College,  Glasgow.     Svo.    ^4.00. 

BONAR  (J.).  — Malthus  and  his  Work.     Svo.    $4.00. 

BOND  (J.  J.).  — A  Handy  Book  of  Rules  and  Tables  for  verifying  Dates  with 
the  Christian  Era,  etc.  Giving  an  account  of  the  Chief  Eras  and  Systems  used 
by  various  Nations;  with  easy  Methods  for  determining  the  Corresponding 
Dates.     ;?i.5o. 

BOOTH.  — Life  and  Labour  of  the  People  in  London.      Edited  by  Charles 

Booth.     121110.    4  vols.    Each  $1.50. 

Vol.  L     East  Central  and  South  London. 

Vol.  II.     Streets  and  Population  classified. 

Vol.  III.     Blocks  of  Buildings,  Schools,  and  Immigration. 

Vol.  IV.     East  London  Industries. 

"  A  really  interesting  as  well  as  a  very  valuable  work,  and  it  is  issued  at  a  wonderfully 
low  price."  —  Athcnceuvt. 

A  Picture  of  Pauperism,  A  Picture ;  and  The  Endowment  of  Old  Age,  An 
Argument.     By  CHARLES  BOOTH.     i2mo.     ^1.25. 

BOUTMY.  —  The  English  Constitution.     By  E.  Boutmv,  author  of  "Studies  in 

Constitutional   Law."     Translated   from  the  French  by   Mrs.  Eaden.     With 

Preface  by  Sir  FREDERICK  POLLOCK,  Bart.     i2mo.     $1.75. 

Studies  in  Constitutional  Law.     France,  England,  United  States.     By  Emile 

BOU  TMY.     Translated  from  the  second  French  Edition  by  E.  M.  DiCEY,  with 

an  Introduction  by  A.  V.  Dicey.     i2mo.    ^1.75. 

"  A  volume  which,  though  scarcely  more  than  a  sketch,  shows  a  singular  insight  in  avoid- 
ing the  errors  usually  made  bv  French  writers  in  discussing  the  political  order  in  England 
and  the  United  States.  M.  Boutmy,  indeed,  deserves  to  be  named  with  honour  as,  after 
Mr.  Bryce,  one  of  the  most  sagacious  students  of  American  institutions  now  living."  — 
Literary  World. 

4 


BOWES  (A.).  — A  Practical  Synopsis  of  English  History  ;  or,  A  General  Sum- 
mary of  Dates  and  Events.  For  the  use  of  Schools.  By  ARTHUR  BowES. 
New  Edition  (the  gth),  revised.     8vo.    30  cents. 

BRACTON'S  NOTE  BOOK.  A  Collection  of  Cases  decided  in  the  King's  Court 
during  the  Reign  of  Henry  the  Third.  Edited  by  F.  W.  Maitland.  3  vols. 
8vo.    ^24.00. 

BRIGHT.  — Works  by  the  Ri';ht  Hon.  John  Bright,  M.P. 

Speeches  on  Questions  of  Public  Policy.     Edited  by  Prof.  THOROLD  Rogers. 

Second  Edition.     2  vols.    8vo.    ^6.00. 

Author's  Popular  Edition.     Globe  Svo.    $1.25. 
Public  Addresses.     Svo.    $2.50. 

BRIGHT  (\V.  Bright,  D.D.).  — Chapters  of  Early  English  Church  History. 
Second  Edition.    Svo.    $3.(Xi. 

BRYCE.  — Works  by  James  Bryce,  M.P.,  D.C.L. 

The  Holy  Roman  Empire.  Eighth  Edition,  revised  and  enlarged.  i2mo.  ;^i.oo. 
Library  Edition.     Svo.     ^3.50. 

The  American  Commonwealth.  2  vols.  Large  i2mo.  Third  Edition.  Re- 
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is  nothing  like  it  anywhere  extant,  —  nothing  that  approaches  it.  .  .  .  Without  exaggera- 
tion it  may  be  called  the  most  considerable  and  gratifying  tribute  that  has  yet  been  bestowed 
upon  us  by  an  Englishman,  and  perhaps  by  even  England  herself.  .  .  .  One  despairs  in  an 
attempt  to  give  in  a  single  newspaper  article  an  adequate  account  of  a  work  so  infused  with 
knowledge  and  sparkling  with  suggestion.  .  .  .  Every  thoughtful  American  will  read  it, 
and  will  long  hold  in  grateful  remembrance  its  author's  name."  —  JVe-:u  York  Thnes. 

Social  Institutions  of  the  United  States.  Reprinted  from  "The  American 
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BUCKLAND  (A.).  — Our  National  Institutions.  A  Short  Sketch.  iSmo.  30  cents. 

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A  Primer  of  English  History.    By  Arabella  Buckley,  author  of  "  History 
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5 


BURKE'S  Works.  —  Continued. 

Vol.  III.    Appeal  from  the  New  to  the  Old  Whigs;  on  the  Nabob  of 

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Life.     By  Sir  J.  Prior.     V/ith  a  Portrait  after  Reynolds,     ^i.oo. 

BURNET.  —  History  of  the  Reformation  of  the  Church  of  England.    A  Nevk^ 
Edition.     Carefully  Revised  by  N.  POCOCK,  M.A.    7  vols.     8vo.     ^7.50. 
History  of  James  the  II.,  with  additional  Notes.     Bvo.     ^2.50. 

BURY  (J.  B.).  —  A  History  of  the  Later  Roman  Empire  from  Arcadius  to 
Irene,  A.D.  395-800.     2  vols.     8vo.    ^6.00. 

CAIRNES  (J.  E.).— Political  Essays.     8vo.     ;^2.so. 

CANNAN  (E.).  —  Elementary  Political  Economy.  i6mo.  Stiff  cover.  25 
cents. 

CHRONICLES  OF  THE  CRUSADES.  — Contemporary  Narratives  of  the  Crusade 
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SAUF;  and  of  the  Crusade  of  Saint  Louis,  by  Lord  JOHN  DE  Joinville. 
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CHRONICON.  Galfridi  le  Baker  de  Swynebroke.  Edited  with  Notes  by  E.  M. 
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CLARENDON.  — History  of  the  Rebellion  and  Civil  Wars  in  England.     By 

Edward,  Earl  of  Clarendon.    Also  his  Life.    Royal  Bvo.    ^5.50. 

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Life,  including  a  continuation  of  his  History.     2  vols.     Medium  8vo.    $5.50. 

The  History  of  the  Rebellion  and  Civil  Wars  in  England,  begun  in  the  year 
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Characters  and  Episodes  of  the  Great  Rebellion.  Edited  with  Notes  by 
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CLARKE  (C.  B.).  — Speculations  from  Political  Economy,    ^i-oo. 

6 


CLINTON. — Fasti  Hellenici.     The  Civil  and  Literary  Chronology  of  Greece. 

Vol.1.     From  the  LVIth  to  the  CXXIl Id  Olympiad.     Third  Edition.     4to. 

$9.00. 
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Epitome  of  the  Hellenici.     8vo.    $1.75. 
Fasti  Romani.    The  Civil  and  Literary  Chronology  of  Rome  and  Constantinople. 

2  vols.    4to.    310.50. 
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COBDEN  (R.).— Speeches  on  Questions  of  Public  Policy.  Edited  by  John 
Bright,  M.P.,  and  J.  E.  Thorold  Rogers.     Globe  8vo.     $1.25. 

CONDE'S  History  of  the  Dominion  of  the  Arabs  in  Spain.  Translated  from 
the  Spanish  by  Mrs.  Fosi'ER.  With  Engraving  of  Abderahmen  Ben  Moavia, 
and  Inde.x.    3  vols.     Each  3i-oo. 

COSSA  (D.  L.).  — Guide  to  the  Study  of  Political  Economy.  With  Preface 
l)y  W.  Stanley  Jevons,  F.R.S.  Third  Edition.    $2.60. 

COXE'S  Memoirs  of  the  Duke  of  Marlborough.  With  his  Original  Corre- 
spondence, collected  from  the  family  records  at  Blenheim.  Edited  by  W. 
COXE,  M.A.,  F.R.S.  Revised  Edition  by  JOHN  Wade.  With  Portraits  of 
the  Duke  and  Duchess  (after  Kneller),and  Prince  Eugene  (after  Schupper). 
With  Index.  3  vols.  Each  $1.00. 
An  Atlas  of  the  plans  of  Marlborough's  campaigns.  4to.  $3.50. 
History  of  the  House  of  Austria.  From  the  Foundation  of  the  Monarchy  by 
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Revolution  of  1848.  To  which  is  added  Genesis,  or  Details  of  the  late  Austrian 
Revolution  (translated  from  the  German).  With  Portraits  of  Maximilian, 
Rhodolph,  Maria  Theresa,  and  Francis  Joseph.  4  vols.  With  Indexes. 
Each  $1.00. 

CUNNINGHAM  (J.).  — The  Growth  of  the  Church  in  its  Organization  and 
Institutions.    $2.js. 

CUNNINGHAM.    The  Growth  of  English  Industry  and  Commerce.     By  the 
Rev.  W.  Cunningham,  B.D.    New  Edition.    8vo.     $4.00. 
The  Growth  of  English  Industry  and  Commerce  in  Modem  Times.    Svo. 
34.50. 

DE  LOLME  on  the  Constitution  of  England,  or  an  Account  of  the  English 
Government,  in  which  it  is  compared  both  with  the  Republican  form  of 
Government  and  the  other  Monarchies  of  Europe.  Edited,  with  Life  of  the 
Author  and  Notes,  by  John  Macgregor.    ^i.oo. 

DICEY.  — Works  by  A.  V.  Dicey,  B.C.L. 
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Edition.    8vo.     33-5<J- 
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7 


DIGBY  (K.  E.).  — An  Introduction  to  the  History  of  the  Law  of  Real  Prop- 
erty, with  Original  Authorities.  Third  Edition.  Clarendon  Press  Series. 
8vo.    ;^2.75. 

DILKE    (Sir    C.    W.).  —  Greater    Britain.      A   Record   of  Travel.      (America, 

Australia,  India.)     121110.     ^2.00. 
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